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LEVY OF INTEREST DURING MORATORIUM

Authored by: Prachi Behl

ABSTRACT

Reserve Bank of India issued a notice dated March 27th declaring the extension of time to pay the instalments of loans and other grants but it also created an interest on the outstanding amount during the tenure of moratorium.

INTRODUCTION

In the month of March, on 27th, Reserve Bank of India issued a number of measures in order to check the impact of the nationwide lockdown that has occurred due to COVID-19 upon financial status of the country.

Therefore, RBI issued a circular giving freedom to all of the financial institution as well as banks to allow a three months moratorium for the payment of instalments with regard to of all term loans that stands outstanding as on 1st March, provided that the borrower makes a request to the bank for the grant of same.  It also stated that the schedule for repayment of such loans along with the residual tenor will be shifted by the tenure of three months across the board, soon after the moratorium period. Interest shall continue to accrue on the portion of the term loan that is still outstanding even during the tenure of moratorium[1].

A plea was filed by a resident of Agra named Gajendra Sharma, which gave a direction in order to declare the certain portion of RBI‘s notification dated March 27 as ultra vires till the extent till which it talks about charging of the interest on the loan amount during the tenure of moratorium, which is tend to create severe hardship to the petitioner who is a  borrower and it also creates impediment and obstacle in enjoyment of the right to life that has been guaranteed by the constitution of our nation under Article 21.

In the current scenario, when almost all of the sources of livelihood has been at stand-by, by the Government of India by the way of imposing a complete lockdown in our nation, the Petitioner, being an Indian citizen, had no way in which he could continue his work and earn livelihood to bearing expenses of him and his family. An in a scenario like this, imposition of interest during the tenure of moratorium will from all of the aspects defeat the purpose for which the moratorium on loans has been permitted[2].

The court of law told the Solicitor General, appearing on behalf of the Centre, that they are of the opinion that the benefit given by the Reserve Bank of India was not being availed to the borrowers.


WAIVER OF INTEREST TO JEOPARDIZE FINANCIAL HEALTH OF BANKS

The Reserve Bank of India stated that the motive behind its circular was to “extenuate the burden of debt servicing on account of the perturbation caused due to the occurrence of this COVID-19 pandEMIc”.

RBI also stated that, though the moratorium has been granted, yet there could not be a discharge of interest as it would menace the financial health as well as the stability of banks.

The decision of granting of the moratorium period for the payment of loan instalment, was to ensure persistence of feasible businesses. The regulatory package to prorogue payment of the loan cannot be interpreted as a discharge. 

Banks, are expected to run feasible commercial considerations as they are the guardians of the money of the depositors. As specified in the affidavit, all of the actions of the banks are required to be guided by the depositor’s interest.

Waiver on interest on loan amount during the tenure of moratorium  granted on the repayment of the term loan would menace the stability as well as the financial health of the banks, along with the interest that needs to be given to the debtors[3].

Interests that are charged by the banks often forms a very important source of income for the banks, thereby, stating the importance of not curbing the banks from charging the interest.

RESPONSIBILITY OF RBI TO CONTROL BANKING BUSINESS

The Reserve Bank of India’s affidavit stated that in order to help the borrowers, it had on 23rd of the May issued an order which stated that the lending institutions may, at their discernment, commute the accrued interest for the deferral period up to August 31, 2020, into a funded interest term loan which will be repayable not later than 31st March, 2021.

As it is governed by the Reserve Bank of India Act along with the Banking Regulation Act, the Reserve Bank of India is entrusted with the responsibility of controlling banking business. Therefore, it is its duty in order to ensure that the banks must carry out the operations providentially. Hence, it would not by any means be appropriate to go for forced discharge of the interest in this case.

LEVY OF INTEREST DESTROYS THE BENEFIT

It seems like a double jinx for the borrowers as on one end income has been curbed due to COVID-19 pandEMIc and on the other end there is a threat of increased tenure of repayment if they choose to opt for relief measure introduced by the Reserve Bank of India.

While referring to the customers, State Bank of India which is the country’s largest lender said “interest must continue to accrue upon the outstanding portion of the term loan even during the moratorium period”.

The interest that will accrued during the tenure of moratorium will be collected by the lending institutions in the form of extra or additional EMIs from those borrowers who have decided to choose the option of taking three months of moratorium.

While explaining the financial burden upon country and financial institutions, an example is quoted, SBINSE -2.08 % was fixed for a home loan of Rs 30 lakh with a remaining maturity of 15 years, internet additional interest would be approx 2.34 lakh adequate to 8 EMIs for those borrowers who choose the moratorium.[4]

Similarly, it quoted that when it comes to “a loan for auto for Rs 6 lakh in which the remaining maturity is of 54 months the additional interest that has to be paid will approximately be of Rs 19,000 that would amount to an additional 1.5 EMIs”.

For the customer who do not want to defer in the way of recovery of EMI’s or instalments, no course of action will follow them and they will continue to pay the instalments in normal course.
State Bank of India clarified that the customers who are willing to defer the process of recovery of EMI’s ), must submit an application as well as an mandate for NACH Extension so that it could stop NACH for these EMI’S or instalments via e-mail to the email ID that has been specified as the collections of such EMI’s or the instalments are affected through National Automated Clearing House (NACH).

 State Bank of India also issued a list of emails for the purpose of sending the application to defer the payment of EMIs.

Indian Banks’ Association (IBA) while responding to the Frequently Asked Questions (FAQ) stated that borrowers upon whose incomes, there have been no impact, should continue to pay their EMIs in time.

The people for whom there has been a disruption in cash flows or are going through loss of income may take the benefits under the package of Reserve Bank of India. However, the borrower must keep in mind that the interest on the loans, though not payable immediately in these times of crises and are postponed by three months, still continues to occur on your account and consequently results in much higher cost.

When it comes to credit card dues, Indian Banking Association said, there is a requirement to pay a minimum amount and if this requirement is not fulfilled then the same gets reported to Bureaus of Credit.

 Though as stated in the circular of Reserve Bank of India, the overdue in the credit card account never gets reported to these bureaus till a tenure of three months.

The notification of the Reserve Bank of India clarified that the repayment schedule for such loans, will be moved forward by three months soon after the moratorium period comes to an end. Interest amount will continue to accrue upon the outstanding portion of the term loans during the moratorium period”.

Instalments if deferred, under the benefit of moratorium period will include principal amount along with the interest components, bullet repayments, EMIs, credit card dues.

CONCLUSION

The people for whom there has been a disruption in cash flows or are going through loss of income may take the benefits under the package of Reserve Bank of India. However, the borrower must keep in mind that the interest on the loans, though not payable immediately in these times of crises and are postponed by three months, still continues to occur on your account and consequently results in much higher cost. Therefore, the borrower must try not to defer the payment of the instalments or the EMI’S as later on he would have to ultimately pay the amount of the instalment or the EMI’S along with an interest. Grant of moratorium is mere postponement of the payment which comes with perils of interest that has to be paid for the tenure of deferment.

Indian Banks’ Association (IBA) also suggested that borrowers upon whose incomes, there have been no impact, should continue to pay their EMIs in time as choosing the course of deferment will cause them to pay an additional interest on the amount of instalment of the EMI’S not paid by them during the tenure of deferment or moratorium.

Thus, the levy of interest during the tenure of moratorium granted by the Reserve Bank of India totally vanishes the motive for which the moratorium on payment of instalments or EMI’S was granted, it rather puts the borrower under more liability.

This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual.

REFERENCE


[1] https://economictimes.indiatimes.com/wealth/borrow/rbi-extends-emi-moratorium-for-another-three-months-on-term-loans-heres-what-it-means-for-borrowers/articleshow/75883777.cms#:~:text=RBI%20in%20a%20press%20conference,outstanding%20on%20March%201%2C%202020.

[2] https://www.financialexpress.com/industry/emi-moratorium-no-case-for-interest-waiver-banks-already-taking-a-big-hit/1986893/

[3] https://www.thehindu.com/business/Economy/sc-questions-rbi-on-payment-of-interest-on-bank-loans-after-three-month-moratorium/article31746908.ece

[4] https://economictimes.indiatimes.com/industry/banking/finance/banking/moratorium-plan-borrowers-unlikely-to-get-significant-gains-banks-to-charge-interest-later/articleshow/74928400.cms?from=mdr

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