Banks to Credit 'Interest on Interest' Repayments by November 5

Banks to Credit 'Interest on Interest' Repayments by November 5

The Reserve Bank of India (RBI) has informed the Supreme Court of India that the banks, financial and non-banking financial institutions have been asked to take necessary actions to credit interest on interest collected on loans of up to 2 crore during the moratorium scheme by 5 November. The RBI, in an affidavit filed through Assistant General Manager Prasanta Kumar Das, referred to the October 23 additional response of the Ministry of Finance and said the federal bank has also acted in pursuance of that by issuing a notification to banks and FIs recently on refund of extra money to the borrowers.

“All Primary (Urban) Cooperative Banks/State Cooperative Banks/District Central Cooperative Banks, all All India Financial Institutions and all Non-Banking Financial Companies (including Housing Finance Companies) to be guided by the provisions of the scheme and take necessary actions within the stipulated timeline therein,” the RBI stated in the affidavit. The top court is scheduled to hear a batch of PILs including the one filed by Gajendra Sharma on October 3 relating to charging of interest on interest by banks on EMIs which have not been paid by borrowers after availing the loan moratorium scheme of RBI during March 1 to August 31.

“I say... Ministry of Finance, Department of Financial Services in view of the unprecedented and extreme COVID-19 situation vide its letter ... has approved a ‘scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (01.03.2020 to 31.08.2020)’ along with operational guidelines and mechanism for such grant,” the RBI official said.

The Centre had earlier told the court that going any further than the fiscal policy decisions already taken, such as waiver of compound interest charged on loans of up to 2 crore for moratorium period, may be ‘detrimental’ to the overall economic scenario, the national economy and banks may not take inevitable financial constraints. The RBI had also filed an affidavit in the apex court saying that loan moratorium exceeding six months might result in vitiating the overall credit discipline, which will have a debilitating impact on the process of credit creation in the economy.

These affidavits were filed following the top court’s 5 October order asking them to place on record the K V Kamath committee recommendations on debt restructuring because of the COVID-19 related stress on various sectors as well as the notifications and circulars issued so far on loan moratorium.

It has also said that the apex court’s interim order of September 4, restraining classification of accounts into non-performing accounts in terms of the directions issued by the RBI, may kindly be vacated with immediate effect. The Kamath panel had made recommendations for 26 sectors that could be factored by lending institutions while finalizing loan resolution plans and had said that banks could adopt a graded approach based on the severity of the coronavirus pandemic on a sector.