RBI Asks Lenders to Refund Interest-on-Interest to All Borrowers for the 6 Month Moratorium Period
The Reserve Bank of India (RBI) has asked all banks and non-banks to refund interest-on-interest to all borrowers for the six month moratorium period that ended on 31 August 2020.
 
The central bank also clarified that asset classification of borrower accounts by all lending institutions following the judgment by Supreme Court should  continue to be governed by the extant instructions as per following:
 
  • For borrowers who did not avail the moratorium, banks must follow extant income recognition and asset classification norms.
  • For accounts which availed moratorium, lenders must remove the period between 1st March to 31 August 2020 for asset classification.
  • For the period commencing 1 September 2020, lenders must follow asset classification as per extant norms. 
 
The notification further added that all lending institutions must immediately put in place a board-approved policy to refund or adjust the ‘interest on interest’ charged to the borrowers during the moratorium period, i.e. 1st March to 31 August 2020 as per the Supreme Court judgement. 
 
Last month, the Supreme Court barred banks from charging interest on interest or penal interest on any borrower during the loan moratorium period. It says, "...there should be no interest on interest or penal interest on the instalments which were due during the loan moratorium period from 1st March to 31 August 2020 on any borrower, irrespective of the loan amount. If such interest has already been collected, it should either refunded to the borrower or adjusted towards the next instalments."
 
RBI says, “In order to ensure that the above 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.”
 
“Borrowers who availed working capital facilities during the moratorium, whether they availed moratorium or not, should also receive refunds or adjustment.  Lenders must disclose the aggregate amount of interest-on-interest refunded or adjusted by them in their financial statements for FY21,” RBI says in a notification.
 
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