Limited succour: On crisis facing borrowers during the pandemic

The Supreme Court’s decision on a batch of petitions seeking waiver of all interest during the period of the pandemic-specific moratorium, relief from compound interest for the period for all borrowers without distinction and extension of the moratorium period itself is a fair verdict. The Court has sought to limit the scope of its juridical intervention to the questions of whether any laws have been violated and whether any actions that banks may have taken under the policy guidance of the government and central bank likely violated any rights of the petitioners. Observing that “wisdom and advisability of economic policy are ordinarily not amenable to judicial review”, the Bench denied all but one of the petitioners’ pleas: it held that the government’s decision to limit the waiver of compound interest to loans under ₹2 crore was “arbitrary and discriminatory” and directed a refund of all compound interest levied during the moratorium period. The Court justly flagged the absurdity of levying the compound interest on any category of loans since by its very nature it was a penal interest intended to impose a cost on wilful or deliberate default, while a borrower’s decision to defer repayment of instalment by availing of the moratorium could not be considered wilful default by any stretch. This part of the ruling would surely come as a welcome relief to borrowers across categories and loan size, while adding a relatively smaller burden — estimated at about ₹7,500 crore — on lenders (or the Centre, if the government decides to foot the bill and spare banks the cost).

On the other hand, the Court appears to have taken a literal view of whether the National Disaster Management Act’s provisions were contravened by authorities’ response to the economic fallout of the pandemic, which it acknowledged to be a disaster due to “biological emergencies”. While the Centre’s and Reserve Bank of India’s arguments that any attempt to extend the moratorium and/or widen the waiver to include regular interest would undermine overall stability in the financial system are undeniably germane, the fact that the pandemic has proved to be an unprecedented disaster in terms of the health and economic costs it has imposed on all sections of society and the economy ought to have evoked a more holistic and expansive fiscal response from the government. Vast sections of small formal and informal enterprises as well as lower income households are saddled with debt that they are certainly bound to struggle to service in the absence of some direct credit support mechanism. So, the Court’s ruling notwithstanding, it behoves policymakers to urgently come up with measures to help mitigate this crisis before lenders are deluged with more defaults.