Not prudent to go for forced waiver of interest, risking financial viability of banks: RBI to SC

The Reserve Bank of India has told the Supreme Court that it is taking all possible measures to provide relief with regard to debt repayments on account of the fallout of Covid-19 but it does not consider it prudent 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”.

In its reply, to a plea challenging levy of interest on loans during the moratorium period which has been extended by another three months till August 31 due to the coronavirus pandemic, the RBI said that regulatory package is, in its essence, in the nature of a moratorium/deferment and “cannot be construed to be a waiver”.

“While the Reserve Bank is taking all possible measures to provide relief to the real sector with regard to debt repayments on account of the fallout of Covid-19, 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 Reserve Bank said in its affidavit.

It said that the mandate of the Reserve Bank as far as regulation of banks is concerned draws upon the considerations of protection of depositors’ interest and maintenance of financial stability, which also require that the banks remain financially sound and profitable.

“That it is submitted that the Reserve Bank of India being the regulator of the banking sector, took cognizance of the probable stress caused in the financial situation and conditions of the citizens of this country - the consequent stress upon the economy due to outbreak of Covid-19 pandemic - and issued a Statement on Developmental and Regulatory Policies dated March 27, 2020…,” it said, adding that legislature has empowered it to determine the banking policies for the banking companies.

On May 26, the top court had asked the Centre and the RBI to respond to a plea challenging levy of interest on loans during the moratorium period.

The plea, filed by Agra resident Gajendra Sharma, has sought a direction to declare the portion of RBI's March 27 notification "as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrower and creates hindrance and obstruction in 'right to life' guaranteed by Article 21 of the Constitution of India".

It has also sought a direction to the government and the RBI to provide relief in re-payment of loan by not charging interest during the moratorium period.

The RBI said that the March 27 circular announcing moratorium was later modified on April 17 and May 23 by which the moratorium period was extended by another three months that is from June 1 to August 31, 2020 on payment of all instalments in respect of term loans (including agricultural term loans, retail and crop loans).

“It is submitted that the regulatory dispensations permitted by the Reserve Bank of India vide the aforesaid circulars dated March 27, 2020 which subsequently stood modified on April 17, 2020 and May 23, 2020 were with the objective of mitigating the burden of debt servicing brought about by disruptions on account of Covid-19 pandemic and to ensure the continuity of viable businesses. Therefore, the regulatory package is, in its essence, in the nature of a moratorium/deferment and cannot be construed to be a waiver,” it said.

The RBI said that in order to ameliorate the difficulties faced by borrowers in repaying the accumulated interest for the moratorium period, on May 23 it had announced that in respect of working capital facilities, 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.

“Further, in respect of term loans, it has been provided that the repayment schedule for such loans, including interest as well as principal, as also the residual tenor, will be shifted across the board,” it said.

It said that lending institutions are required to provide the said reliefs to all eligible borrowers and disclosed in public domain. Since the customer profile, organizational structure and spread of each lending institution is widely different from others, each lending institution is best placed to assess the requirements of its customers.

“Therefore, the discretion regarding deciding the eligibility of customers and manner in which the customers are on-boarded for availing this benefit, including the manner of recovery of the interest accrued during the moratorium period, has been left to the lending institutions concerned,” the banking regulator said.

It added that the banks are commercial entities that intermediate between the depositors and the borrowers and are expected to run on viable commercial considerations.

“Moreover, the banks being custodians of depositors’ money, their actions need to be guided primarily by the protection of depositors’ interests. Any borrowing arrangement is a commercial contract between the lender and the borrower and the interest rates reflect the same", the RBI said.

"It is further submitted that the interest on advances forms an important source of income for banks and after meeting the cost of funds, the banks also need to sustain reasonable interest margins for viable operations,” the RBI said.