The Reserve Bank of India (RBI) told the Supreme Court (SC) that the six-month moratorium provided by banks on loans was only a deferral and not a waiver, and waiving off interest rates would threaten the stability of the banking system and have huge consequences, it said. It made this submission in a plea filed for interest rates not to be charged for the period of the moratorium.
The RBI has given a six-month moratorium on term loans, which ends on August 31. For the duration of this period, those who avail the moratorium will not have to pay at the moment, but interest will accrue for this period.
When the matter came up in front of the Supreme Court on Thursday, the RBI stated that it would not be prudent to go for a forced waiver of interest risking financial viability of the banks.
The plea, filed by Gajendra Sharma, sought a direction to declare the portion of RBI's March 27 notification as "ultra vires" since it charges interest on the loan amount during the moratorium period and hence "create hardships" to borrowers and "creates hindrance and obstruction in 'right to life' guaranteed by Article 21 of the Constitution of India."
Sharma, a resident of Agra, has also sought a direction to the government and the RBI to provide relief in re-payment of loan by not charging interest during the moratorium period. The petitioner stated that the purpose of the moratorium was to alleviate the interests of the people, but the same was defeated as interest continued to be levied.
A bench of Justices Ashok Bhushan, Sanjay Kishan Kaul and M R Shah observed that these are challenging times and it is a serious issue as on one hand moratorium is granted and on other hand interest is charged on loans. The court also observed that economic interest is not higher than the health of people.
The RBI, in an affidavit to the top court on Wednesday stated that if the moratorium was granted to only 65% of the outstanding term loans, the monthly interest that is forgone by banks is estimated to be Rs 33,500 crore. “Since the moratorium period has been permitted for six months, the total interest income thus foregone will be about Rs 2,01,000 crore,” it stated. This amount, of Rs 2 lakh crore, comes to 1% of GDP, and only accounts for the banking system and not non-banking financial institutions and other institutions, it stated.
The RBI stated that it was taking all possible measures to provide relief, but “does not consider it prudent or appropriate to go for a forced waiver of interest, risking the financial viability of the banks it is mandated to regulate, and putting the interests of the depositors in jeopardy.”
The RBI added that any economic relief provided has an opportunity cost, and if the petitioner’s argument is accepted, then the opportunity cost of such a waiver would be borne by lending institutions and depositors, it stated.
It said the mandate of the Reserve Bank as far as regulation of banks is concerned draws upon the considerations of protection of depositors' interest and maintenance of financial stability, which also require that the banks remain financially sound and profitable.
The RBI has said that the March 27 circular announcing moratorium was later modified on April 17 and May 23 by which the moratorium period was extended by another three months that is from June 1 to August 31, 2020, on payment of all instalments in respect of term loans (including agricultural term loans, retail and crop loans).
"Therefore, the regulatory package is, in its essence, in the nature of a moratorium/deferment and cannot be construed to be a waiver, it has said.
The RBI said that in order to ameliorate the difficulties faced by borrowers in repaying the accumulated interest for the moratorium period, on May 23 it had announced that in respect of working capital facilities, lending institutions may, at their discretion, convert the accumulated interest for the deferment period up to August 31, 2020, into a funded interest term loan (FITL) which shall be repayable not later than March 31, 2021.
The Supreme Court has sought the Finance Ministry’s reply in the matter by June 12 and allowed the petitioner and other parties to file a reply by then.
With PTI inputs