Public sector banks could face a charge of Rs 1,800-2,000 crore due to a recent Supreme Court ruling on waiving compound interest on all loan accounts that have opted for a moratorium between March and August 2020, sources said. The judgment covers loans over Rs 2 crore, as loans below that amount got general interest on the interest relief in November of last year.

The compound interest support scheme for the loan moratorium cost the government Rs.5,500 crore in 2020-2021 and the scheme covered all borrowers, including the one who did not benefit from the moratorium. According to banking sources, initially 60% of borrowers benefited from a moratorium and gradually the percentage fell to 40% and even less as collection improved with the ease of foreclosure. In the case of businesses, this percentage was as low as 25 percent for public sector banks.

They further said the banks would offer a compound interest waiver for the period in which a borrower took advantage of the moratorium. For example, if a borrower avails itself of a three month moratorium, the waiver would be for that period. The RBI on March 27 last year, announced a loan moratorium on the payment of installments of term loans maturing between March 1 and May 31, 2020, due to the pandemic, later the same was extended until August 31.

The Supreme Court’s order this time is limited only to those who invoked the moratorium, so the liability of the public sector bank is expected to be less than Rs 2,000 crore by rough calculations, added sources. Also, they said, the ordinance does not specify a timeframe for the settlement of compound interest, unlike last time, so that banks can design an adjustment or structured settlement mechanism.

Meanwhile, the Association of Indian Banks (IBA) wrote to the government to compensate the lenders for the interest on the interest waiver. The government would take an appeal based on various considerations. Last month, the Supreme Court ordered that no compound or criminal interest be charged to borrowers for the six-month loan moratorium period, which was announced last year amid the COVID-19 pandemic , and the amount already invoiced must be refunded, credited or adjusted. .

The Supreme Court refused to interfere with the Center and Reserve Bank of India (RBI) decision not to extend the moratorium on lending beyond August 31 last year, saying it was ‘a political decision. Rejecting the requests for a complete waiver of interest, the court ruled that such a decision would have consequences for the economy. The bench also said the waiver of interest would affect depositors. Along with this, the court also dismissed the claims for further relief in the case.