RBI Reserve Bank of India
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Not appropriate to go for forced waiver of interest risking financial viability of banks: RBI tells Supreme Court on moratorium issue

Shruti Mahajan

In its counter affidavit filed before the Supreme Court, the Reserve Bank of India (RBI) has said that a waiver on interest during the moratorium on term loan repayment would risk the financial stability and health of the banks.

In view of the COVID-19 pandemic, the RBI had issued a circular on March 27 allowing banks to grant a moratorium to borrowers on payment of instalments for a period of three months.

On May 22, the RBI announced the extension of the three-month moratorium period till August 31, thereby making it a six month moratorium. Consequently, the interest on the term loan would be accrued for six months, should a borrower avail the benefit of moratorium.

The Supreme Court had sought a response from the RBI on the question of whether interest ought to be charged from the borrowers if they availed the benefit of the moratorium on loan repayment pursuant to RBI's circular.

Petitioner Gajendra Sharma, personally aggrieved by the charging of interest by the banks, had moved the Supreme Court and said that the objective of the circular would be rendered futile if interest is levied, considering it would result in increased EMIs accruing at a later stage. Therefore, interest ought not to be charged for this period, it was prayed in the petition moved before the Supreme Court.

The RBI has now made its position clear on the subject, stating that there cannot be a waiver of interest, as it would jeopardise the financial health and stability of banks as also the interests of debtors.

The objective behind the RBI's move was to mitigate the burden of debt servicing on account of the disruption caused due to the COVID-19 pandemic and the consequent lockdown. The same was done keeping in mind the necessity to ensure continuity of viable businesses. In this light, the reply filed by the RBI states,

"Therefore, the regulatory package is, in its essence, in the nature of a moratorium/deferment and cannot be construed to be a waiver."
RBI's reply in the Supreme Court.

The counter highlights that the RBI, in order to help with the difficulties that borrowers may face in repaying accumulated interest, also announced on May 23 that the "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."

As regards granting moratoriums, the RBI's circular requires lending institutions to evolve policies approved by their Boards for providing relief to eligible borrowers. Every institution is best suited to identify the requirements of its customers, the RBI says, adding that this is the reason the discretion was left with the lenders.

Further elaborating on the importance of permitting banks to charge interest, the RBI says that banks are expected to run viable commercial considerations and are in fact guardians of the depositors' monies. The actions of the banks, the affidavit says, need to be guided by the interests of the depositors. The interests charged by the banks would form an important source of income, the reply states.

The Reserve Bank goes on to state that it is governed by the RBI Act and the Banking Regulation Act, and is entrusted with the responsibility of superintendence and control of banking businesses. It is the duty of the RBI to ensure that banking institutions' operations are carried out prudently and in adherence to sound principles of banking.

Therefore, RBI has stated that it would not be appropriate to go for forced waiver of interest in this case.

"[I]t (RBI) 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."
RBI's reply in the Supreme Court

Read the Counter Affidavit

RBI's Reply in Gajendra Sharma case on interest during Moratorium.pdf
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