Due to the sudden outbreak of the Coronavirus Pandemic, the economy had to face several repercussions. To redeem it from irreversible damages, a number of measures were announced by the Reserve Bank of India. This was done to save the Indian economy as much as possible. Among several other measures, RBI also announced to grant a three months Loan Moratorium relief to their borrowers for term loans outstanding as on 1st March 2020. What is Loan Moratorium, why is it significant, and legality it possesses is further discussed in the article.
WHAT IS LOAN MORATORIUM?
A moratorium can be defined as the delay or postponement of an activity or a law. In legal terms, a moratorium can be defined as the temporary delay of a law to allow the resolution of a lawful opposition.
Here, the term loan moratorium is referred as a postponement of legal responsibility or payment of debt.
Loan Moratorium is introduced in India by RBI as a measure of monetary policy to safeguard the people who are dealing with temporary financial crisis due to some sudden disturbance in the Indian Economy. In this case, due to the sudden outbreak of the pandemic, which lead to the lockdown of the whole country leaving the economy hanging off the cliff.
In technical terms, it's a temporary relief instrument formed by RBI, which would provide a relief from the repayment of loan for three months. This is done in order to help the borrower to take a gap from the repayment of loans, the instalments or interests due.
WHY IS LOAN MORATORIUM IMPORTANT?
Given the crisis the world is facing at the moment, Loan Moratorium acts as a relief for a number of people facing financial hardships.
As it allows a temporary delay of three months for the repayment of loans, instalments or EMIs, it gives the borrower a gap to plan their finances.
It is seen that Loan Moratorium is already present in the educational loans which is sanctioned to the students. It is because there might be a time gap between the student graduating and getting a job.
However, it is advised to people who has liquidity to repay the loan amount at the time prescribed as the interest continues to accumulate as it is supposed to be even during the moratorium period.
WHAT IS A MORATORIUM PERIOD?
A Moratorium period is the time period when the borrower is not compelled to repay his EMIs or instalments. In other words, it is a pause for a limited period, which gives the borrower adequate time to plan and enhance their finances.
After the cessation of the moratorium period, the repayment of the instalments resumes immediately. Here, in India, the RBI provided a three-month loan moratorium initially on 27th March, 2020 for all the installments between 1st March, 2020 to 31st May, 2020. It was further extended for another three months from 1st June, 2020 up to 31st August, 2020.
LOAN MORATORIUM DURING PANDEMIC IN INDIA:
The sudden outbreak and widespread of the Pandemic not only affected India, but also almost all the parts of the world. It had a great impact on the health sector, industries, infrastructure and the economy of the country was not spared either. The unforeseeable and dubious attitude along with lack of information of the global market and economic sector led to the extensive financial crisis. It resulted in unemployment and reduction in salaries of a large number of working people.
It is when the Loan Moratorium was announced by RBI on 27th March, 2020 instructing the banks and housing finance companies to grant a three-month loan moratorium relief to the borrowers for all the installments due between 1st March, 2020 to 31st May, 2020.
As per RBI’s instruction, suspended instalments would include the following payments during the moratorium period:
Credit card dues.
After the completing of initial three months, the RBI again extended the moratorium period for a further three months from 1st June, 2020 up to 31st August, 2020.
SMALL-SCALE INDUSTRIAL MANUFACTURES ASSOCIATION (Regd) v. UNION OF INDIA & Ors1 (The Loan Moratorium Case)
This case was filled in the Supreme Court of India over a continuing dispute between the lenders and the borrowers regarding the interest charges which were accumulated on the outstanding loan during the moratorium period.
The judgment of this case was passed on 23rd March, 2021 and it was decided by the Supreme Court that:
They should not meddle with the economic judgment of the Central Government and the RBI.
They should not to grant the relief sought by the Petitioners for extending the moratorium period further.
However, the Supreme Court decided that no accumulated interests should be charged with any interest on interest/compound interest/penal interest of the lenders and financial lending institutions which was to be charged during the moratorium period.
Small-Scale Industrial Manufactures Association (Regd.) v. Union of India & Ors1 (THE LOAN MORATORIUM CASE)
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
WRIT PETITION (C) NO. 476 OF 2020
PETITIONER: Small Scale Industrial Manufactures Association (Regd.)
RESPONDENT: Union of India and others.
BACKGROUND OF THE CASE:
On 27th March, 2020, RBI issued the Statement of Development and Regulatory Policies (RBI Circular), where several relief measures were declared in order to lessen the financial crisis and burden faced by the people of the country due to the outbreak of the pandemic leading to the whole lockdown of the country and pushing the people towards financial catastrophe.
Among several measures, all the financial sectors involved in lending business were asked to grant a loan moratorium for three months of repayment of instalments due from 1st March, 2020 to 31st May, 2020. It was further extended by RBI for three months from 1st June, 2020 to 31st August, 2020.
However, it was stated in the notification issued by RBI that the interest on the pending loan amount would be accumulated during the moratorium period as it was to be charged in the normal circumstances. It was to be paid immediately after the moratorium period ends.
This condition was not accepted by various MSME associations, real estate sector associations and a number of borrowers. Discontented by this condition, they filed several Writ Petitions before the Supreme Court seeking relief and also asked for a complete waiver of the accumulated interest/compound interest during the moratorium period.
Furthermore, the demanded that the moratorium period should be extended beyond 31st August, 2020.
ARGUMENTS BY THE PETITIONER
It was argued by the Petitioner that there was a failure on part of the Central Government who failed to recognize the degree and irreversible consequences of the pandemic on the economy of the country which posed great danger to both individual borrowers and also financial institutes.
It was pointed out by the Petitioner that the ‘disaster management’ factor was not taken under consideration by the RBI Circular which provides grants of relief and modification to the borrowers affected by the pandemic.
To support their cause further the pointed that focus was placed in Section 72 (2) of the Disaster Management Act, 2005 which states the provision of this Act has an upper hand over other laws and authorities.
Finally, the petitioner ended its cause by pointing out that the RBI was not the Statutory Authority. However, it plays a supporting part in taking decisions regarding the instruments of relief and concession to an individual under the task management of the DMA, 2005.
ARGUMENTS BY THE RESPONDENT:
In their counter argument, the Respondent argued that the term ‘Moratorium’ and its extent was with regard to the definition stated in the RBI Circular. It pointed out that the term ‘Moratorium’ was not to be mistaken for ‘waiver of interest’ but ‘deferment of interest’ as it was never intended to be waiver of interest in the first place.
Furthermore, the Central Government through Insolvency and Bankruptcy Code (Ordinance) 2020 had safeguarded corporate borrowers from financial hardship and the threat of being declared insolvent by terminating the functioning of Section 7, Section 9 and Section 10 of the Insolvency and Bankruptcy Code, 2016.
As per the arguments presented related to the overriding effect of DMA, 2005 with the application of Section 72 and Section 13, the Respondent depended upon the word ‘may’ which is considered as a ‘recommendation’ and not ‘obligation’ and the decisions of the cases of Pradip Kumar Maity v. Chinmoy Kumar Bhunia and UOI v. Kumho Petrochemicals Co Ltd. as well.
JUDGEMENT OF THE SUPREME COURT:
After hearing the arguments of the both sides, the Apex Court came to a conclusion that the SC has limited power of Judicial Review in terms of economic policy. The court further recapitulated the decision given in the matter of State of MP v. Nandala Jaiswal and BALCO Employees’ Union (Regd.) v. Union of India, where it was stated that the judicial review is limited in terms of economic policy unless it can be proved that the policy is against any statutory provision of the Constitution.
The SC left the matter in the hands of the Central Government and RBI to ultimately decide prudently what is best for the national interest in terms of economic relief to be formulated and granted for the financial benefits of the individuals facing crisis.
The SC refused the Petitioners’ request to issue any Writ of Mandamus to the Central Government and RBI in order to announce further relief packages.
The Court furthermore decided with regards to the complete waiver that it would cause a prejudice to the national economy and on banks and lenders too. It would be too ambitious and grievous for the economic sector overall. Hence, no complete waiver can be granted.
The SC also refused to extend the moratorium period beyond 31st August, 2020.
Lastly, to conclude its judgement, the Court stated that no interests shall be charged with any interest on interest/compound interest/penal interest as it supported its decision by saying the non- payment of instalment during the moratorium period was not a willful one and hence it would be unjust to charge so. The Court order all the banks and finance lending sector to abide by the same and refund or adjust the interest charged during the moratorium period.
NAME: RIYA SINGH
1ST YEAR SOUTH CALCUTTA LAW COLLEGE