The Supreme Court of India doesn’t see merit in banks charging interest on interest on loans where moratorium has been given to borrowers. The court on Wednesday observed that the government can't leave everything to banks and can consider intervening in the matter. The government, the Reserve Bank of India (RBI) and the country’s top lender, State Bank of India (SBI), have been maintaining that interest waiver on moratorium loans isn’t a feasible idea.
SBI even said that interest waiver cannot be given like a 'free gift'. The RBI had said that the approximate interest amount, if the moratorium is given to 65 percent of term loans, will be around Rs 2 lakh crore.
For beginners, the context here is the six-month moratorium the RBI announced for borrowers in the wake of COVID-19. The moratorium (or deferral of EMIs) was initially announced for three months (March 1 to May 31) but it was extended to August 31. The idea was to give some relief to the stressed borrowers who suffered loss of income due to the prolonged, nationwide lockdown announced by the government to contain the spread of the virus. To be clear, the moratorium announced is deferral of EMIs, not a waiver of loans. On the directions of the RBI, most banks have offered a moratorium to term-loan borrowers but continue to charge interest during the period.
The bankers' dilemma
Interest payments on deposits and loans are the basic principles on which the banking system operates. Banks pay interest to depositors against the money parked with them in savings or fixed deposits (FDs) and charge interest from borrowers. In other words, banks use the interest earned on loans to pay the depositors. If banks are asked to stop taking interest on the money they lend, it will disturb this balance. If the apex court insists that banks cannot charge interest on loans, it will impact the ability of the lenders to pay interest to the depositors as well.
Interest payment on bank deposits is crucial for a large section of the population who park their money in banks, considering FDs as safer instruments. Bank deposits are the preferred option for a large section of investors, especially senior citizens and the retired, who rely on monthly interest payments to meet their expenses. In the recent past, there has been a rise in demand for bank deposits on account of the high volatility in other financial instruments and general uncertainty in financial markets. People have faith in banks as the guardians of public money. Why should these depositors be punished for no fault of theirs?
There are a few other issues worth considering. Not all moratorium applicants are financially stressed. According to bankers, many borrowers have applied for the moratorium to save capital. Several others have decided not to avail the facility and continue with repayments.
What is the rationale of waiving interest across all loans in this context? The RBI’s decision to allow deferral of EMIs should be seen as putting off of payments in a crisis period and not as a loan waiver. Banks and the RBI have been transparent about the extra interest payment burden on those opting for the moratorium. Hence, the RBI’s argument that the banking system’s health is at risk if it directs banks to waive interest for the six-month moratorium period is very valid. If the RBI is forced to issue a diktat to banks to waive the interest amount, the temporary moratorium exercise will turn into a full-fledged loan waiver. That isn’t the idea here.
Savers already hit
With sharp fall in interest rates across savings products in the recent months, savers are already hit. Bank FD rates have fallen below 6 percent for 1-3 years. For many senior citizens who are risk-averse to approach volatile investments (equities, mutual funds) and relatively illiquid assets (real estate), bank deposits are the only preferred option that offers a safe avenue. In a press release issued on June 16, Amitha Sehgal , secretary of All India Bank Depositors Association, a body representing depositors, has highlighted the likely impact on depositors if banks are forced to waive interest on moratorium loans.
“If banks do not charge interest from their borrowers during the period of moratorium, it would be difficult for them to honour their obligation to depositors. This would tantamount to violation of Section 22(3) of the Banking Regulation Act, 1949, which protects payment of interest due to the depositors. This may have far-reaching consequences,” Sehgal said.
Further, financial savings in the country may dwindle remarkably making it hard to finance domestic investment. In the absence of a good social security system, depositors as a group will be deprived of their means of livelihood, particularly the senior citizens, who depend largely on interest income, the release says. “Keeping all that in view, we strongly urge the Supreme Court and all the concerned authorities that the voice of bank depositors should be heard, and taken enough cognizance of,” Sehgal said.