One year of lockdown: How the loan moratorium saga unfolded
A look at how the loan moratorium saga unfolded and understanding the impact it had on the borrowers and banks
Following the lockdown, many people lost their jobs and several businesses got shut down. With no monthly flow of income, one of the biggest worries was to pay the impending loan instalments. To this effect, the Reserve Bank of India (RBI) announced a moratorium period of three months in March 2020 for people facing financial problems. The moratorium period was later extended by another three months till August 2020.
During the moratorium period, borrowers were not tagged as defaulters and their credit scores were not affected. However, there was one issue. Borrowers were charged with additional interest or “interest on interest” for missing EMIs. An Agra-based eye-glass owner, Gajendra Sharma, challenged the loan relief plan, along with other borrowers, in the Supreme Court.
On October 14, the Supreme Court directed the Centre to implement the “Compound Interest Waiver Scheme” as soon as possible. The Centre then came out with the scheme, which promised a grant of ex-gratia payment of the difference between compound interest and simple interest for six months to borrowers. For example: If one has a loan of Rs 30 lakh and the rate of interest is 7.5%, then for the moratorium period of 6 months simple interest worked out to Rs 1,12,500 while compound interest works out to Rs 1,14,272. Cashback comes to Rs1,772.
The benefit of the waiver scheme was higher for people with newer loans compared to borrowers with older loans as the interest component is higher in the first case. The scheme was applicable to almost all kinds of loans and borrowers. The scheme was for borrowers with an outstanding amount not exceeding Rs 2 crore as on February 29, 2020.
The Supreme Court on March 23, 2021, ruled that the waiver benefit will be extended to all types of loans, including those above Rs 2 crore. While the period remains the same, there will be no charge of interest on interest by lenders during the loan moratorium period, March 1, 2020 to August 31, 2020. A three-judge bench of Justices Ashok Bhushan, MR Shah and Sanjiv Khanna held that “there shall be no charge of interest on interest during the moratorium period from any borrowers and whatever amount has been recovered by the way of interest on interest shall be refunded and adjusted in the next instalment of the loan account.”
The judgement came as a relief for people who wanted the scope of loan to be increased to include all kinds of loans.
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