The Supreme court ruled against giving a complete interest waiver to borrowers but they have to be compensated for the interest charged on the 6 month moratorium period, i.e., compound interest. The complete waiver of interest can affect depositors. The apex court refused to extend the six months loan moratorium period.
Stocks of banks like SBI, IndusInd, ICICI, Axis, and HDFC went up between 2 to 2.5% after the verdict. The SC refused to interfere between the government’s and RBI’s decision to not extend the moratorium period last year. The verdict was announced on the basis of the pleas filed by various trade associations.
What Is A Loan Moratorium?
When situations like an earthquake appear that affect routine for a long time, a moratorium helps with financial issues until normalcy returns. It is granted by the government or the Central bank.
Example is the COVID-19 pandemic which has affected lives for more than a year now. Millions and millions of people were affected leading to a lockdown in most of the nations. It has impacted the global market severely and led to economic recession.
The Indian government enforced a lockdown in the whole country to fight the virus. Many lost jobs, train and bus services were stopped. A huge number of businesses had to suffer.
Due to the impermanent financial hardship, RBI had to announce on 27th March that banks and Housing Finance Companies will have to give their borrowers a 3-month moratorium on loans. The installments that fell between 1st March and 30th May 2020 were to be considered for the moratorium period.
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What Is A Moratorium Period?
The borrower is not expected to make any repayment during the loan term in this moratorium period. Repayment of EMIs starts again after this period. The repayment usually starts after the loan is paid. Because of the moratorium period, the payment starts after a while and has to be paid monthly.
This provision is basically available to students with Education Loans because it is repaid after they start working. Due to the lag between them completing studies and beginning to earn, the feature of the moratorium period is facilitator.
If a customer can pay then they should not choose a moratorium as the interest keeps increasing on the loan amount even during the period.
Moratorium is not a waiver but rather it is a delay in EMIs. The repayment tenure and due dates are extended by some months from the expiry of the moratorium but the interest keeps accruing on the loan amount.
On the loan moratorium case, the government supported the idea of a compound interest waiver. The pleas were to waive interest completely but that would affect the banks enormously as they have to pay interest to the
The total interest waiver would have been around 6 lakh crores according to government estimates. It would have restrained the government financially and also the banking sector. Fortunately, the apex court rejected the plea for a total interest waiver. The SC approved banks to start labeling NPAs (Non-Performing Assets) as NPAs and no extension on the moratorium could be provided.
What Is NPA?
NPA is a loan that is overdue for 3 months. RBI defines it as an asset that becomes non-performing when it ceases to generate income for the bank.