RBI asks banks to refund 'interest on interest' collected during Covid moratorium on loans

The Reserve Bank of India (RBI) has directed all banks and NBFCs to immediately put in place a board-approved policy to refund or adjust the 'interest on interest' charged to borrowers during the moratorium period of March 1 to August 31, 2020.

In a major relief to big borrowers, the Supreme Court last month ruled that no penal or compound interest would be charged on any loans, including those above Rs 2 crore, during the six month moratorium announced by the government against the backdrop of the Covid-19 pandemic.

In a notification to all commercial banks and other financial institutions, the RBI said: "All lending institutions shall immediately put in place a Board-approved policy to refund/adjust the 'interest on interest' charged to the borrowers during the moratorium period, i.e. March 1, 2020 to August 31, 2020 in conformity with the above judgement."

In order to ensure that the Supreme Court judgement is implemented uniformly in letter and spirit by all lending institutions, methodology for calculation of the amount to be refunded or adjusted for different facilities shall be finalised by the Indian Banks Association (IBA) in consultation with other industry participants and bodies, which shall be adopted by all lending institutions, it added.

It noted that the reliefs shall be applicable to all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed.

Lending institutions shall disclose the aggregate amount to be refunded or adjusted in respect of their borrowers based on the above reliefs in their financial statements for the year ending March 31, 2021.