Are interest and compound interest waiverable? (COVID case)

Answer

A:

Yes, but with certain limitations. During the COVID-19 pandemic, the Government of India and the Reserve Bank of India (RBI) issued special relief measures allowing waiver of interest on interest (compound interest) for borrowers under the loan moratorium scheme. However, complete waiver of regular interest was not permitted, as that would have affected the financial health of banks and NBFCs.

• In March 2020, RBI announced a moratorium on loan EMIs for 6 months (March–August 2020).

• Borrowers were allowed to defer payments, but interest continued to accrue on the outstanding principal.

• Several petitions reached the Supreme Court of India, demanding waiver of compound interest (interest on interest) during this moratorium.

• The Court held that banks cannot be forced to waive base interest, since they also need funds to operate.

• However, the Government agreed to provide relief by waiving compound interest (interest on interest) for certain categories of borrowers.

• The waiver applied to loans up to ₹2 crore across categories like home loans, MSME loans, education loans, consumer durable loans, auto loans, credit card dues, etc.

• The difference between compound interest and simple interest for the moratorium period was borne by the Government and refunded to eligible borrowers.

1. Regular Interest (Simple Interest) → Not waivable in general, as banks rely on it for survival.

2. Compound Interest (Interest on Interest) → Can be waived in exceptional circumstances (like COVID-19), with government intervention and compensation to banks.

• Outside the COVID-19 special scheme, waiver of interest or compound interest is generally not allowed unless specifically ordered by courts, RBI, or through government-backed settlement schemes.

• Borrowers can still negotiate one-time settlements (OTS) with banks, where part of the interest or penal interest may be waived.

• Interest (simple interest) on loans is generally not waivable.

• Compound interest (interest on interest) was specifically waived by the Government during the COVID moratorium for loans up to ₹2 crore, based on Supreme Court directions.

• Waiver beyond such special schemes can only be done through bank-approved settlements or government schemes, not by default.