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Moratorium or Waiver - The Dispute Continues!

Given that the compounded interest often constitutes a good part of the loan repayments, waiver of such interest is likely to bring relief to those who had availed the moratorium.

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From March itself, the eyes of the corporate sector have been on the Reserve Bank of India to see the reliefs that can be granted to them for the loans they had availed. The relief came in the nature of moratorium for three months which was further extended and ultimately followed by certain additional prudential measures for restructured accounts. In light of this, the case of Gajendra Sharma v. Union of India & Anr. before the Supreme Court has garnered significant interest, where a waiver on the interest has been sought, as opposed to just a moratorium. The Central Government has stated in its affidavit before the Supreme Court that it is willing to waive off compounded interest for loans up to Rs. 2 Crore for the moratorium period for identified categories of borrowers. This waiver specifically aims to provide relief to the most vulnerable category of borrowers, such as the MSME sector, personal loans, home loans, automobile loans, education loans, small retail borrowers, etc. It is pertinent to note that while the eligible borrowers will continue repaying contractual interest on the outstanding loan, the waiver stipulates that the interest component will not be added to the principal outstanding. Given that the compounded interest often constitutes a good part of the loan repayments, waiver of such interest is likely to bring relief to those who had availed the moratorium.

Given that the intention of the relief is only for those borrowers affected / impacted by the moratorium, it is unlikely that the borrowers who had opted out of the moratorium would get any benefit of such waiver. Banks and financial institutions have been firmly opposing waiver of compounded interest. Given the nature of business for a bank, this relief could significantly impact their ability to pay interest on term deposits and could also lead to them increasing their rate of interest across the board for certain facilities. However, at the end of the day, there are no free lunches and it is likely that the Government may have to compensate such lenders for waiver of such interest through a suitable relief package. Reports suggest that around 25-40% of the borrower accounts of the lending institutions would be eligible for the relief and the cost to the Government could lie somewhere between Rs. 5,000-6,000 crore.

The Government, while arguing against blanket waiver, has clarified its stance once again that the moratorium was never a “waiver” but a “deferment” to help borrowers cope up with the adverse effects of the pandemic and has therefore, provided limited relief to the borrowers. The bigger picture which this waiver addresses is that, the waiver of compounded interest for target category of borrowers having up to Rs. 2 Crore will shield lending institutions’ balance sheet from any significant adverse impact due to relatively lesser exposure of such loans, as opposed to a blanket waiver of compounded interest for all borrowers.

With the moratorium having come to an end on August 31, 2020, the clock is ticking for the concerned borrowers. Once again, the Indian banking industry has been given the responsibility of being the frontrunner in keeping the Indian economy afloat and will have to strategise the possible outcomes. The dispute will further highlight the challenges faced by the Government, financial institutions and the borrowers in meeting social and economic objectives, which are not aligned in this instance. Waiver of compounded interest is a developing story and some clarity may emerge as the case continues on the next date of hearing which is on November 02, 2020.

This column has been co-authored by Jasraj Narula, Associate, Shardul Amarchand Mangaldas & Co.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Veena Sivaramakrishnan

The author is Partner, Shardul Amarchand Mangaldas & Co.

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