Loan Moratorium During Pandemic: Legal Angle

INTRODUCTION

In today’s competitive society when our needs are more than our earning, the easiest solution we seek to meet our needs is to borrow a loan like house loan, car loan, business loan, personal loan, student loan etc. Now-a-days, both public and private banks provide this loan facility and it is quite satisfying  as one can pay back the loan amount in EMIs/ installments. So have you ever taken any loan, but struggling to pay it off during the lockdown?

In the year 2020 when Covid-19 pandemic hit across the globe and lockdown was imposed as a weapon against the transmission of said virus, the economies of every country, including India face huge financial crisis and many people lost their jobs as business get closed. Due to loss of income, every individual has been struggling to pay back their loans. In order to tackle this issue, our government with the help of RBI (Reserve Bank of India) came up with a solution i.e. Loan Moratorium. Now the question that arises is what Loan Moratorium is and is it really helpful in solving our issue of loan repayment during lockdown? All such queries will be answered in this article.

LOAN MORATORIUM: MEANING AND IMPACT

‘Loan Moratorium’ is a facility offered by the banks in which the payment of monthly loan installments is suspended for a particular period of time or until the favorable condition appears. Here, the period for which borrowers used this facility and are not required to make their loan repayments is known as ‘Moratorium Period’. One of such example is ‘Student Loan’ in which repayment of the loan is suspended until the student gets a job and starts earning.  

Similarly in the times Covid-19 pandemic in order to provide relief to the borrowers during lockdown, loan moratorium was granted by the RBI notifications dated March 27, 2020 and May 23, 2020 which was further extended for a maximum period of 2 years[1]. According to the RBI, the suspended installments under this moratorium period were:

 According to the RBI, the suspended installments under this moratorium period were:

a) Principal and/or interest components;

b) Bullet repayments;

c) Equated monthly installments (EMIs);

d) Credit card dues.[2]

At present also, in view of the difficulties faced by individual borrowers during the second wave of pandemic, RBI with notification dated May 5, 2021 provided a relief in the form of a second moratorium.[3] According to this notification, the borrowers who did not opt for the first loan moratorium as mentioned above can opt for the second one and those who had already opted will get their first moratorium extended.

LEGAL VALIDITY OF PANDEMIC LOAN MORATORIUM POLICY

LOAN MORATORIUM CASE[4]

During last year’s lockdown, the legality of the Loan Moratorium policy was challenged by various lenders and borrowers before the apex court of India on the ground that the levy of “interest on interest” (I.e.  the charging of compound interest or penal interest on their outstanding portion of the term loans during the moratorium period) under it is unjustifiable.

On March 23, 2021, the Supreme Court in its judgment refused to grant total waiver of interest on Loan Payments which was accrued during the moratorium period. Rather, the court directed the banks to not charge any interest on interest/compound interest/penal interest for the moratorium period i.e.  From March 1 to August 31 last year as such interests are unjustifiable and chargeable only on willful or deliberate default in making loan repayment. Moreover, the court also ordered the banks that any amount already recovered under the same head (i.e. interest on interest/compound interest/penal interest) shall be refunded to the concerned borrowers and to be given credit or adjusted in the next installment of loan account.

VISHAL TIWARI V. UNION OF INDIAN AND ORS

On May 10, 2021, in the matter of Vishal Tiwari V. Union of India and Ors.,[5] the petitioner challenged the second moratorium granted by RBI under Resolution plan 2.0 dated May 5, 2021 on the basis that it is arbitrary, unfair and just an eyewash and the immediate intervention of this Court is required in the interest of the public due to following reasons:

  • The moratorium period granted under the present plan has only allowed the Restructure of the Term loans of Micro, medium and Small Enterprises (MSME’s) but is not sufficient for the service sector (Professionals/lawyers) and the self-employed sector because they are facing serious financial crises at present and requires a moratorium period longer than this.
  • It is not a sound relief in this present situation for all those stressed sectors and individuals for whom sustenance and existence has been a question and is always under the threat of accounts being declared NPA.

Hence, in view of enforcing fundamental rights envisaged under Article 14, 19 and 21 of the Indian Constitution, the plea has sought directions to the Respondents to permit the lending institutions to grant interest free moratorium period for term loan and defer the payment of loan installments for a period of six months or till Situation from COVID 19 Normalizes. The instant petition is still pending before the hon’ble Supreme Court of India.

CONCLUSION & SUGGESTION

The Loan Moratorium policy announced by the government is indeed a great relief for the borrowers who are struggling for their sustenance during pandemic. However, like every coin has two sides, the benefits under this policy also came with a condition of accrual of interest on their outstanding portion of the term loans during the moratorium period. As a result of which many individuals who opted for the moratorium scheme had to pay a higher amount afterwards. Though this condition has been challenged in a number of instances, the court didn’t find any rational in interfering with the economic decisions of the government and therefore denied to provide complete waiver of all interests on the outstanding loan amount.

In my opinion, such levy of interest on the outstanding principal amount is justifiable due to the following reasons:

Firstly, if the person opting moratorium scheme will not be charged with any interest during the moratorium period, it will be discriminatory against those who are consistently making their loan repayments during lockdown.

Secondly, if the banks will not charge any interest on them, the banks financial condition will also get downgraded.

Lastly, the major reason is that in case of complete waiver of interests, all the cost will be borne by the government[6] and ultimately the burden will fall on the taxpayers.   

Hence, an interest free loan moratorium will be a burden than a relief for the citizens.


[1]Available at: https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=11942 (last visited on May 11, 2021)

[2] Available at: https://www.business-standard.com/about/what-is-moratorium/2 (last visited on May 11, 2021)

[3] Available at: https://economictimes.indiatimes.com/wealth/borrow/how-individual-borrowers-can-use-rbis-second-loan-moratorium-offered-due-to-coronavirus/articleshow/82401195.cms?from=mdr (last visited on May 11, 2021)

[4] Small-Scale Industrial Manufactures Association (Regd.) v. Union of India & Ors Writ Petition (C) No. 476 of 2020

[5] Available at: https://www.livelaw.in/pdf_upload/moratorium-petition-1-1-393183.pdf (last visited on May 11, 2021)

[6] Available at: https://www.livelaw.in/top-stories/supreme-court-loan-moratorium-covid-npa-financial-banks-173892 (last visited on May 11, 2021)


Author: Kanchan Bala from Lovely Professional University, Phagwara.


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