'Banks Not Passing Benefits Of Multiple Cuts In Policy Rates To Customers': Plea In SC Seeks Extension Of RBI Loan Moratorium, Fixation Of Lending Rates

A writ petition has been filed in the Supreme Court seeking the extension of the loan moratorium announced by the Reserve Bank of India beyond August 31 for a period of 18 months.

The petition filed by Coimbatore Jewellery Manufacturers Association also seeks a direction to the RBI to fix the lending rates of banks by contending that "banks have failed to pass on the benefits of reduced rates of interest to their customers despite multiple cuts in policy rates (repo, reverse repo and bank rate) made by RBI".

It was on March 27 that the RBI Governor, Shaktikanta Das, announced the decision allowing banks and lending institutions to allow moratorium for term loans from March 1 to May 31. On May 22, the moratorium period was further extended till August 31.

The writ petition filed Coimbatore Jewellery Manufacturers Association states that the economy is yet to recover from the losses inflicted by the COVID-19 pandemic and the nationwide lockdown. It is pointed out that several regions of the country continue to be under lockdown.

"Thus, most businesses, including those of the members of the Petitioner association have not been able to restart operations. The crisis has worsened because of workers employed by the members of the Petitioner association, shifting back to their home states.

The Petitioners submit that periodic extensions in the moratorium period will lead to further economic uncertainty and speculation. It is in this background that the Petitioners seek a direction that Respondent No.2, fix the moratorium period to 18 months", reads the plea filed through Advocate Pranjal Kishore.

Benefits of reduction in policy rates not passed on to the customers

Another issue highlighted in the petition is regarding the non-reduction of lending rates by the banks in proportion with the cutting down of policy rates by the Reserve Bank of India.

It is pointed out that the repo, reverse repo and bank rates have been reduced on 5 separate occasions since 2019. The repo rate was reduced by a total of 135 basis points in 2019. These reductions in policy rates have been accompanied by a reduction in the Statutory Liquidity Ratio ("SLR"). The SLR which stood at 19.25% in April, 2019 has now been reduced to 18%.

The following table is incorporated in the petition to highlight the issue:

"It is clear from a bare perusal of the above, that banks have not reduced interest rates in accordance with the reduction in policy rates by the Respondent No.2. As such, even though Respondent No.2 has reduced these rates in order to provide succour to citizens, it is banks that have profited from these reductions", the plea states.

 Despite the repo rate, the reverse repo rate and the bank rate being the lowest ever, there has been no corresponding decline in the rate of interest on loans given out by banks.

It is pointed out that the Ministry of Finance had issued a directive in September 2019 "to link all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks with effect from October 01, 2019 to external benchmarks." These external benchmarks include the repo rate, government of India treasury bill yield etc.

The petitioner laments that despite this directive, banks have failed to reduce interest rates of even floating interest rate loans.

The petition states that the RBI has the power to fix the lending rates as per Section 21 and 35A of the Banking Regulation Act, 1949.

The petitioner submits that the power to issue directions under Section 21 and 35-A is coupled with the duty to act in the public interest.

"It is humbly submitted that the Reserve Bank of India has taken various policy decisions in order to reduce the rate of interest on loans advanced by banking companies. However, the benefits of these decisions have not percolated to citizens, because of banks failing to reduce the rates of interest on advances. It is thus submitted that this is a fit case for the Respondent No.2 to exercise its powers under Section 21 read with Section 35A of the Banking Regulation Act, 1949 in order to fix the rate of interest at which loans are advanced by banking companies", the plea states.

The plea also seeks waiver of levy on interest during the moratorium period. The accrual of interest defeats the purpose of Emergency Credit Line Guarantee Scheme (ECLGS), states the petition.

On July 27, a bench comprising Justices Ashok Bhushan, R Subhash Reddy and M R Shah issued notice on the petition. The petition has been tagged along with the batch case challenging the levy of interest during the moratorium period and will be taken up next on August 28.

Senior Advocate Sanjay Hegde appeared for the petitioner.