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Small Scale Industrial Manufactures Association (Regd.) v. Union of India

Writ Petition (Civil) · 2021 INSC 203Decided 23 Mar 2021
Writ Petition (Civil) No. 476 of 2020
Justice Ashok Bhushan · Justice R. Subhash Reddy · Justice M.R. Shah

Background

During the COVID-19 pandemic, the RBI announced a loan repayment moratorium (March-August 2020) allowing borrowers to defer EMIs, but banks continued to charge compound/penal interest ("interest on interest") on the deferred amounts. A batch of writ petitions by trade associations, individual borrowers and businesses across sectors (MSMEs, power, real estate, and others) sought a complete waiver of interest during the moratorium, an extension of the moratorium period, sector-specific relief packages, and a challenge to a government scheme that only waived "interest on interest" for loans up to Rs. 2 crore in specified categories. The petitioners argued the government and RBI's response to the pandemic's economic fallout was inadequate and arbitrary, including an alleged failure of the National Disaster Management Authority (NDMA) to perform its statutory duties.

Decision Breakdown

The Supreme Court declined to grant a blanket waiver of all interest during the moratorium, to extend the moratorium period itself, or to order sector-wise or additional relief packages, holding these were matters of economic policy for the Government and RBI and that courts should not ordinarily interfere in fiscal policy absent manifest arbitrariness. It also held the NDMA had not failed in its statutory duty under Section 13 of the Disaster Management Act, since that provision uses the discretionary word "may" and the NDMA had in fact given recommendations to the RBI. However, the Court found no rational basis for restricting the "waiver of interest on interest" benefit to loans up to Rs. 2 crore and specific categories, calling the eligibility conditions arbitrary and discriminatory. It further held that since repayment was deferred (not waived) via the moratorium, charging compound/penal interest, which is meant to penalise willful default, could not be justified when non-payment during the moratorium was never willful. The Court directed that no interest on interest/penal/compound interest be charged for the moratorium period for any borrower, and any amount already collected under that head must be refunded or credited against future instalments.

Lesson Learnt

Courts generally defer to the Executive's economic and financial policy choices during a crisis, but will strike down specific conditions within a relief scheme that are arbitrary or irrationally discriminatory: here, resulting in the "interest on interest" waiver being extended to all borrowers, not just those in favoured categories or below an arbitrary loan-size cutoff.

Official source (sci.gov.in)View Judgment (PDF)

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