Interest During Moratorium: Supreme Court's Ruling on Loan Repayment Relief During COVID-19

This case arises from a writ petition filed by Gajendra Sharma challenging the notification issued by the Reserve Bank of India (RBI) on 27.03.2020, which allowed banks to impose interest on loans during the moratorium period provided due to the COVID-19 pandemic. The petitioner, who had availed a housing loan, contended that charging interest during the moratorium period was ultra vires and unconstitutional, as it caused financial hardship, particularly when people’s livelihoods were affected by the pandemic and the resulting lockdown.

Background of the Case

The petitioner, Gajendra Sharma, had taken a home loan of Rs. 37,48,000/- from ICICI Bank. When the COVID-19 pandemic was declared by the World Health Organization, the National Disaster Management Authority declared a nationwide lockdown to curb the spread of the virus. In response, the Reserve Bank of India (RBI) issued a notification on 27.03.2020, offering a moratorium on loan repayments for three months, later extended to six months. While this moratorium allowed borrowers to defer their loan repayments, the RBI stipulated that interest would continue to accrue on the outstanding amount during this period. The petitioner challenged this condition, claiming it violated the right to life under Article 21 of the Constitution.

The petitioner argued that interest during the moratorium would only add to the financial burden and that the additional interest on interest would be detrimental to the interests of borrowers, thus violating the principles of fairness and justice.

Petitioner’s Arguments

The petitioner, represented by learned counsel, argued the following points:

The interest during the moratorium period should not have been charged as it undermines the very purpose of offering a moratorium. The borrower should have been relieved from both principal and interest payments during this period.
Imposing interest on the accrued interest during the moratorium increases the borrower’s debt and does not provide any real relief, which goes against the very essence of the moratorium intended to provide financial relief during the pandemic.
The imposition of interest during the moratorium violates the petitioner’s right to life under Article 21 of the Constitution, as it significantly impacts the borrower’s ability to live a dignified life in the wake of the economic downturn caused by the COVID-19 crisis.

“The moratorium, intended to provide relief, instead exacerbates the financial difficulties of the borrowers. Charging interest on interest during such a time is unjust and should be quashed.”

Respondent’s Arguments

The respondent, the Union of India and the Reserve Bank of India, represented by learned counsel, argued the following:

The decision to continue charging interest during the moratorium period was made after careful consideration of the economic challenges posed by the pandemic. It was part of the broader relief measures to ensure that the financial system remained stable.
The RBI’s policy aimed to provide a balance between alleviating the burden on borrowers and ensuring the stability of the financial sector. The moratorium was not meant to absolve borrowers from their financial obligations but to offer temporary relief by deferring payments.
The additional interest accrued was not meant to punish the borrowers but to allow lending institutions to continue functioning and protect their financial health.

“The policy was designed to help borrowers by offering a deferment of payments. The interest charges during the moratorium period were a necessary measure to maintain financial stability during an unprecedented crisis.”

Supreme Court’s Ruling

The Supreme Court, after considering the arguments, delivered its judgment in favor of the Union of India and the RBI. The Court made the following observations:

The Court acknowledged the severe economic impact of the COVID-19 pandemic and the government’s efforts to provide relief to borrowers, but it upheld the RBI’s decision to charge interest during the moratorium period.
The Court emphasized that the government and RBI had taken various measures to mitigate the financial impact of the pandemic, and the moratorium itself was a significant step to support borrowers during a time of crisis.
While the petitioner’s concerns were valid, the Court noted that the charging of interest was necessary for maintaining the health of the financial system and that the government had provided targeted relief to borrowers through other measures, such as waiving interest for loans up to Rs. 2 crore in specific sectors.
The Court did not find that charging interest during the moratorium violated the right to life under Article 21, as the relief measures provided by the government were seen as sufficient to support borrowers during the pandemic.

“The imposition of interest during the moratorium is a policy decision made to ensure the stability of the financial system, and while it may cause temporary inconvenience, it does not violate the fundamental rights of the borrowers.”

Conclusion

The Supreme Court’s judgment underscores the delicate balance that must be maintained between providing relief to borrowers and ensuring the stability of the financial system during times of crisis. While the Court recognized the burden on borrowers, it upheld the RBI’s decision to charge interest during the moratorium period, acknowledging that this was necessary to maintain the functioning of the financial institutions. The judgment serves as a reminder that financial relief measures must be carefully calibrated to address both individual needs and systemic stability.

Petitioner Name: Gajendra Sharma.
Respondent Name: Union of India and Reserve Bank of India.
Judgment By: Justice Ashok Bhushan, Justice R. Subhash Reddy, Justice M.R. Shah.
Place Of Incident: New Delhi.
Judgment Date: 27-11-2020.

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