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Is RBI Loan Repayment Moratorium A Missed Opportunity- Impact On Individual Borrowers

RBIís decision to not grant further extension of moratorium on repayment of term loans which ended on August 31, 2020 and the decision to charge compound interest on loans during moratorium period will leave the stressed borrowers in the lurch.

Background
On March 27, 2020, RBI released a COVID 19- Regulatory Package. A three month moratorium period was announced on repayment of term loans from March 1, 2020 to May 31, 2020, this period was further extended until August 31, 2020. The moratorium period allowed deferment of installments as a way to ease the impact of COVID 19 on the borrowers. Itís clear from the RBI notification that the only intention of such a relief was deferment of repayment and not waiver of interest.

The choice was left on the borrowers to avail this moratorium period. The banks continued compounding the interest on the loans, the only relief given to the borrowers was not categorising them as defaulters and no penal interest will be charged in case they defer payment of installments during these 6 months.

Aggrieved by the decision of the banks for charging compound interest on loans during moratorium period, Gajendra Sharma who is a borrower has filed a plea before the Supreme Court for the waiver of interest as the interest adds on to the economic hardships already created by the pandemic which hampers the Ďright to lifeí guaranteed under Article 21 of the Constitution of India. The matter is pending before the three judge bench comprising of Ashok Bhushan, R. Subhash Reddy and MR Shah. The Supreme Court has passed an interim order to protect the borrowers from getting their accounts declared NPA till this case is disposed off.

Possible Future Of The Borrowers

There can be four possible alternatives in the current situation. (1) Charging compound interest on loans, (2) Charging simple interest on loans, (3) Charging compound interest or simple interest on loans but on concessional rates, and (4) waiver of interest.

The purpose behind the moratorium was to reduce the burden of debt repayment as Indian economy faces downturn. At the time of announcement it was expected that deferment will provide a relief period to the stressed borrowers; after six months economy will revive and borrowers will be in a better position to repay by September 2020. It reality, borrowers are in a worse situation as compared to March 2020. Individual borrowers have become unemployed, there is delay in payment of salaries, they have to face huge salary cuts and to cope with the situation they have burned off their savings. What lies ahead of them are 6 months of loan instalments on which they have to pay interest on interest.

The moratorium period was an opportunity for the government to come up with a revival plan to strengthen and support the economy, but not much was done. In this scenario, where economic distress has worsened, charging compound interest from borrowers is nothing less than exploitative and it will result in piling of NPAs. At the same time it will be unjustified to coercing banks into complete waiver of interest amount. The pandemic has detrimental effect on banking sector as well. This sector needs support.

India is not the only country to announce moratorium. Countries like UK, Malaysia, Brazil, Singapore etc. have announced similar measures. The only difference is that there government is not leaving them half way with increased debts. Singapore has given generous period of moratorium till December 31 and Malaysia has strictly instructed banks not to charge compound interest during moratorium period.

Way Forward
Earlier moratorium period was a missed opportunity, itís time the government starts working in tandem with the RBI. A three month moratorium period should be announced and only simple interest should be charged during this time. In that period, government should come up with a package to boost our economy. Gradually the economy has started reopening, it is hoped that it will improve the financial situation of the borrowers. Meanwhile, banks should not harass individual borrowers to repay during moratorium.

Written By: Kritika Jaiman, Symbiosis Law School Pune, B.A LL.B

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