RBI warns SC against allowing waiver of interest for moratorium period

RBI warns SC against allowing waiver of interest for moratorium period:

Reserve Bank of India (RBI) warned the Supreme Court of not allowing a plea seeking waiver of interest for the six month moratorium period on loan repayments, ending on August 31. The RBI, in its reply to the SC, has estimated that a “forced” waiver of interest will hurt banks by as much as Rs 2 lakh crore (1% of GDP), which will have "huge consequences" for stability of the entire financial system.

RBI filed a reply, after the SC issued a notice seeking a reply from the regulator on a waiver of interest dues plea on the six-month moratorium announced by the central bank.

On March 27, RBI issued a circular asking financial institutions to allow customers a moratorium on loan installments that fall between March 1 and May 31. On May 22, RBI extended the moratorium for another three months, until August 31.

RBI argued that a "forced waiver is neither prudent nor appropriate". The RBI cautioned that the waiver of interest may risk financial viability of banks, which in turn may put depositors in jeopardy.

The central bank reasoned that banks must remain sound and profitable to ensure safety of depositors and financial stability of the country. RBI argued that interest of loans is an important source of income for banks and to remain viable lenders need to sustain reasonable interest margins.

RBI further clarified that the borrowing or a loan is in the nature of a commercial contract between the lender and borrowers, and that the interest rate reflects the same. The central bank also argued that the benefits of an interest waiver, enjoyed by borrowers, would entail a cost which must not be transferred to banks.

The banking regulator asserted that the petitioner had erroneously construed the moratorium as a waiver, whereas it was a deferment of existing and current liabilities.

RBI assured that the regulator was alive to the constraints caused by the lockdown and that was the reason behind extension of the moratorium to six months, ending on August 31 instead of May 31. The apex bank also submitted that it had allowed corporate companies to repay accumulated interest, after August 31, as a funded interest term loan until Mar 2021.

The RBI, importantly, has clarified that availing benefits under the scheme is entirely as per the lenders' policies. The RBI reply clarifies that discretion regarding eligibility of customers, on-boarding of customers and manner of interest recovery has been left to the banks and financial institutions.