No forced interest waiver on loan moratorium: RBI to SC

No forced interest waiver on loan moratorium: RBI to SC

The RBI on Tuesday refused to grant any ‘forced’ interest waiver on loan moratorium, saying it will risk not only the financial viability of the banks, but will also put the interest of depositors in jeopardy. Besides, it will hurt banks by as much as Rs 2 lakh crore (1% of GDP).

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The banking regulator in its reply to the Supreme Court said it was taking all possible measures to provide relief to the real sector with regard to debt repayments on account of the fallout of Covid-19, but “it 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.”

The fact that the waiver of interest is having far-reaching effect on the economy cannot be ignored and the larger public interest of the economy always takes precedence over the individual cases of hardship, it said.

The interest on advances forms a vital source of income for banks and allows them to sustain and remain financially sound and profitable, the reply stated, adding that the banks have the discretion of how they will recover the interest accrued during the moratorium period.

The RBI on May 22 had granted extension of its previously announced three-month term loan EMI moratorium by another 3 months to August 31, 2020. The central bank on March 27 had announced a three-month EMI holiday from March 1 till May 31 on all term loan repayments including home loans.

The RBI’s response came after the SC on April 30 had asked the RBI to examine if benefits of its policy decision on the three-month moratorium on fixed-term loans and EMIs are being passed on to borrowers.

A batch of petitions had challenged a part of the March circular with regard to recovery of interest accrued on the outstanding portion of the term loans during the moratorium period of between March 1 and May 31.

According to the regulator, the allegation of imposition of interest during the period is devastating is totally wrong as this would mean “turning a blind eye towards the fact that a borrowing arrangement is a commercial contract executed between the lender and the borrower and the interest rates reflect the same”.

The RBI in its reply said the objective of the circular was that when the country is under lockdown and the businesses are closed and consequently the employed persons are facing cash flow losses, loan obligations should not come as a double whammy during this period…The moratorium period merely permits the lending institutions to postpone the payments that will fall due during the moratorium period.”

 

Source:- financialexpress

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