Centre sanctions 973.74 Crore to SBI for compensation payment to borrowers

Tags: Economics/Business

The Union Cabinet led by Prime Minister Narendra Modi approved the sanction of 973.74 Crore to State Bank of India (SBI) as reimbursement related to the loan moratorium that was implemented in 2020 amid the corona  pandemic.

What is the Issue 

Reserve Bank of India On March 27, 2020 announced a loan moratorium  for selected customers who were facing financial difficulties due to pandemic induced lock down and its detrimental consequences on economic activities throughout the country. The selected borrowers were offered an option not to pay their loan for a period from  1 March 2020 till 31 August 2020.  However the banks continued to charge compound interest and also levied penalty interest for non payment of loans by customers during the 6 month moratorium period This  action of the bank was challenged in the Supreme Court.  

Supreme Court Judgement

The Supreme Court in its judgement delivered on 23 March 2021, ruled that banks cannot charge penalty on interest for accounts that sought moratorium relief during the pandemic period last year and the amount collected must be refunded by the banks to the customer account . It also refused to waive interest during the moratorium period.

Government Scheme to help the Banks 

Due to the Supreme Court judgement the banks had to refund the collected penalty interest amount to  the customer and forgo the penalty interest . This created a burden on the already troubled Banking system in the country . To provide relief to the banks ,Government of India in October 2020 announced “ Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (1.3.2020 to 31.8.2020)”.

Main Points of the scheme 

• Under this scheme the government of India will compensate the banks which had suffered loss due to Supreme Court Judgement and the Government will pay the difference between compound interest and simple interest for  the six months of loan moratorium period on loans upto Rs 2 Crores .
• The Government of India made SBI the nodal bank under this scheme 
• The Banks were asked to submit their claims to the SBI and through SBI ,the Government will reimburse the banks .
• Initially the Government of India provided Rs 5500 crore for this claim  which  was later distributed to the banks through SBI .
• However  fresh claims of Rs 973.74 crore have been received by SBI from the  banks and  to meet the demand Government of India has provided Rs 973.74 crore to SBI.