Loan Moratorium and Interest Waiver: Supreme Court’s Landmark Decision on MSMEs and Financial Relief

The COVID-19 pandemic led to an unprecedented economic crisis, impacting businesses and individuals alike. Many enterprises, particularly MSMEs, faced severe financial distress due to nationwide lockdowns. To mitigate the impact, the Reserve Bank of India (RBI) introduced a regulatory package that provided a moratorium on term loans and working capital facilities. However, multiple petitions were filed in the Supreme Court challenging the sufficiency of these relief measures, demanding a complete waiver of interest, extension of moratorium, and sector-specific economic aid.

The Supreme Court of India, in its judgment in Writ Petition (C) No. 476 of 2020 and connected matters, addressed these concerns. The case was led by Small Scale Industrial Manufactures Association as the petitioner, with the Union of India and others as respondents.

Arguments by the Petitioners

The petitioners argued that the relief measures introduced by the RBI, such as the loan moratorium and deferred payments, were inadequate. They contended that:

• The moratorium should include a waiver of the interest component for the entire period.
• The compounding of interest during the moratorium period imposed an additional financial burden on borrowers.
• The Disaster Management Act, 2005 (DMA) should be invoked to provide sector-wise economic relief.
• The National Disaster Management Authority (NDMA) failed to recommend adequate financial relief under Section 13 of the DMA.
• The RBI’s circulars allowed discretion to lending institutions rather than mandating relief measures.
• The real estate sector, power producers, and other industries were disproportionately affected and required special packages.

Response by the Union of India and RBI

The government and RBI opposed the petitions, arguing that:

• A complete waiver of interest was not feasible as it would impact the banking sector and depositors.
• The government had already introduced multiple relief packages, including the Aatma Nirbhar Bharat initiative.
• The moratorium was only a temporary relief, not a long-term solution.
• Sector-specific relief measures were being implemented through targeted economic packages.
• Allowing further extensions of the moratorium could lead to financial indiscipline and increased non-performing assets.

Supreme Court’s Observations and Verdict

The Court, led by M.R. Shah, analyzed the arguments and held:

“The relief sought cannot be granted in its entirety as it would have far-reaching implications on the economy. However, we direct that there shall be no interest on interest (compound interest) for loans up to Rs. 2 crores during the moratorium period.”

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The key directives from the judgment were:

• The waiver of compound interest (interest on interest) for loans up to Rs. 2 crores.
• The government was required to bear the burden of this waiver.
• Extension of the moratorium was not granted, emphasizing the need for economic revival.
• The NDMA was directed to formulate sector-specific relief measures.

Impact of the Judgment

The judgment provided partial relief to borrowers, particularly small businesses and individuals with limited credit exposure. While it did not grant a blanket waiver of interest, it mitigated the burden of compounding interest. The ruling struck a balance between financial stability and borrower protection.

This case highlights the judiciary’s role in addressing economic distress and ensuring equitable financial relief during crises.

Petitioner Name: Small Scale Industrial Manufactures Association.
Respondent Name: Union of India and others.
Judgment By: Justice M.R. Shah.
Place Of Incident: India.
Judgment Date: 23-03-2021.

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