Waiver Of Interest On Loans During Moratorium Affects Stability Of Financial Institutions, RBI Tells SC

The Reserve Bank of India (RBI) has filed its counter affidavit stating that a waiving off interest on term loan repayments during moratorium would not be prudent as it would hit the health of banks & risk their financial stability.

On May 26, the Top Court had sought a response from the RBI in a plea regarding the levy of interest on loan amounts during the stipulated moratorium period, which has now been extended upto August 31, 2020.

A bench comprising Justices Ashok Bhushan, SK Kaul and MR Shah had granted one week's time was to the Centre and RBI to respond to the plea of a borrower who stands aggrieved by RBI's March 27 Notification, in as much as it allows interest on loan to be charged during the moratorium period.

The RBI has stated that if the six-month moratorium period on loan repayments is declared interest-free, then losses incurred will be Rs 2,01,000 crore, amounting to close to 1 per cent of the national GDP.

"Since the moratorium period has been permitted for six months, the total interest income thus foregone will be about Rs 2,01,000 crore. This amount is close to 1 per cent of the national GDP. And this is only for the banking system, without counting the NBFCs and all India financial institutions. If the banks are required to forego the above amount, there would be huge consequences for the stability of the banking system" - Extract of RBI's Counter Affidavit

In wake of the Covid19 pandemic, RBI issued a circular on March 27 asking financial institutions to allow customers a moratorium on loan instalments that fall between March 1 and May 31. This was a mitigating move in order to provide respite to the borrowers.

"Any economic relief has an opportunity cost, and if the argument of the petitioner is accepted, the same would amount to shifting the opportunity cost of the reliefs enjoyed by the borrowers by virtue of moratorium to the lending institutions and depositors of the country," said the RBI.

The interest on advances forms an important source of income for banks and after meeting the cost of funds, the banks also need to sustain reasonable interest margins for viable operations, the central-bank of India stated.

On May 22, the RBI extended the moratorium for another three months, until August 31.

Petitioner Gajendra Sharma, who is aggrieved by the charging of interest on his loan, moved the apex court arguing that the objective of the circular would be rendered futile if interest is levied, and a multiplied effect will show up in increased EMIs at a later stage. Therefore, the interest should not be charged during the moratorium period.

RBI has stated that it cannot do so as it would directly effect the financial health of banking system.

"Banks are commercial entities that intermediate between depositors & borrowers. They are expected to run on viable commercial considerations" said the RBI, adding that interests and advances formed an important source of income for banks.

Sharma had further stated that the waiver of interest as aforementioned was imperative as his right to life due to imposition of the lockdown stands effected in as much as it was putting his Right To Livelihood at risk.

To this, the RBI stated,

"It is well settled that the fundamental right to life includes all the components of right to life; however, the subject matter before this court holds greater importance qua the economy of the country. It is emphatically denied that the circular issued by the answering Respondent (RBI) interfere in any manner with the employment or livelihood of any citizen of this country."

Click To Download Counter-Affidavit