A counter affidavit had been filed by The Reserve Bank of India (RBI) 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.
The Supreme Court had sought a response from the RBI on May 26,in a plea regarding the levy of interest on loan amounts during the stipulated moratorium period, which has now been extended up to August 31, 2020.
One week’s time was granted to the Centre and RBI by a bench comprising of Justices Ashok Bhushan, SK Kaul and MR Shah, 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. Losses incurred will beRs 2,01,000 crore, amounting close to 1 per cent of the national GDP, if the six-month moratorium period on loan repayments is declared interest-free, stated the RBI.
“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
A notice on March 27 was issued by RBI 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 borrowersamidst Covid19 pandemic.
“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 central-bank of India stated that an important source of income for banks is the interest on advances and after meeting the cost of funds, the banks also need to sustain reasonable interest margins for viable operations.
The RBI extended the moratorium for another three months on May 22, until August 31.
Petitioner Gajendra Sharma, who is aggrieved by the charging of interest on his loan, argued to the SC thatif interest is levied, a multiplied effect will show up in increased EMIs at a later stage and that the objective of the notice rendered would become futile. Hence, the interest should not be charged during the moratorium period.RBI stated that the financial health of banking system would be affected, if done so.
“Banks are commercial entities that intermediate between depositors & borrowers. They are expected to run on viable commercial considerations” said the RBI, and added that interests and advances formed an important source of income for banks.
The waiver of interest as aforementioned was imperative as theright to life due to imposition of the lockdown stands effected in as much as it was putting the Right to Livelihood at risk, stated the petitioner.
In response, 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.”