RBI rejects possibility of loan moratorium extension, tell SC not viable

Last updated on February 21st, 2023 at 12:59 pm

RBI rejects possibility of loan: On Wednesday, Reserve Bank of India told Supreme Court that extension of loan moratorium was not possible and would lead to downfall in nation’s economic growth. RBI submitted its statement in response to the plea filed in the apex court by various industry bodies including Association of Power Producers, Confederation of Real Estate Developers Association of India and Shopping Centres Association of India etc.

A three-judge bench led by Justice Ashok Bhushan has been hearing the pleas by multiple industries seeking customised reliefs in repayment of loans in the wake of coronavirus pandemic. The industries collectively objected against RBI’s decision to charge interest on term loans during the moratorium period, which was announced due to the pandemic onslaught.

Solicitor General Tushar Mehta, who has been representing the Centre, emphasised that any further waiver on interest to the borrowers (for both commercial and personal loans) would “mean forgoing an estimated over Rs 6 lakh crore”. RBI provided six-month loan moratorium, from March till August 31, as a relief to the financial stress caused by the pandemic.

“If the interest is waived on all the loans and advances for the moratorium period, about all classes and categories of borrowers, the amount to be foregone would be more than Rs 6 lakh crore… if the banks were to bear this burden, it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark over their very survival. This was one of the main reasons why a waiver of interest was not even contemplated and only payment of instalments was deferred,” Mehta told the court.

“Continued payment of interest (including interest on interest) to depositors is not only one of the most essential banking activities but is a huge responsibility that can never be compromised as most of the depositors are bound to be small depositors, pensioners etc. surviving on the interest from their deposits,” the SG added. 

SG bench has not yet given any verdict over the matter and extended the matter for further hearing, scheduled on December 14. Though the panel clarified that it would not take any decision which would risk the economy going “haywire.” 

In its defence, the Indian Banks Association presented the case of SBI, which it stated that would lose more than half of its net worth, which it built over nearly 65 years of its being. It specified that it was not possible for even the largest bank to let go of the six-month moratorium loan interest. SBI’s interest amount from borrowers during six months moratorium amounted out to be around Rs 88,078 crore whereas the interest payable to the depositors during the same period was around Rs 75,157 crore.

Mehta said that the Finance Ministry under the Disaster Management Act, and RBI implemented much needed measures. “The overriding objective was to prevent financial markets from freezing up; ensure normal functioning of financial intermediaries; ease the stress faced by households and businesses, and keep the lifeblood of finance flowing,” the SG stated.

Mehta told the court, “The Kamath Committee set up by the RBI has recommended financial parameters for debt restructuring of 26 sectors affected by Covid-19. For corporate accounts (other than MSMEs with up to Rs 25 crore exposure) which were up to 30 days overdue as on March 1, 2020, the framework of August 6, 2020, provides lenders and borrowers various ways of ensuring viability. At the same time, the prudential framework of June 2019 continues to be available for cases not covered under the August 6 framework.”

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