Money & Banking

Depositors may lose out if borrowers get waiver on interest: AIBDA

Our Bureau Mumbai | Updated on June 17, 2020 Published on June 17, 2020

The All India Bank Depositors Association (AIBDA) fears that depositors would be most severely hit if borrowers get waiver of interest during the Covid-19 lockdown-related moratorium period.

The Association reasoned that if interest waiver is allowed, banks would inevitably seek to cover their potential or actual loss of interest income through further cutbacks in the deposit interest rates.

In fact, the AIBDA underscored that there is a clear case for the protection of depositors’ interest by way of freezing the deposit rates at the pre-Covid levels.

While the Association has requested the RBI to freeze the deposit rates, the latter is yet to respond.

“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,” cautioned the AIBDA.

The AIBDA’s observations come in the backdrop of a public interest litigation (PIL) being admitted by the Supreme Court seeking an interest waiver during the period of moratorium in the context of the lockdown.

The AIBDA said it is greatly perturbed about the possible ramifications of the likely loan interest waiver on the banking sector, and on the prudential financial discipline of the borrowers.

Dire consequences

Amitha Sehgal, Honorary Secretary, AIBDA, said: “Historically, loan/interest waivers have happened only during extreme economic setbacks, and the sovereign has adequately covered that. However, during the current year, there will be an unprecedented shortfall in revenues, both at Centre and State levels, due to the lockdown. Hence, the government’s fiscal position will not permit a sovereign cover for the waiver of interest.”

Sehgal observed that if banks are not compensated, some may even go for liquidation. There may be serious disruption in the process of financial intermediation, she added.

“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,” she said.

In fact, the Association underscored that banks have reduced their deposit rates dramatically during the recent period, which is not only applicable to new deposits but also to all deposits due for renewal.

“The depositors have already suffered a major setback due to the RBI’s ultra-accommodative monetary policy. The real return on deposits has become negative during the last several months as against a positive real return of 2 per cent recommended by several Committees in the past,” she said.

“If the Supreme Court permits an interest waiver, borrowers who have not opted for moratorium shall be discriminated against those who have. This would encourage non-payment of EMIs and severely vitiate the credit culture, which is detrimental to the survival of banks,” explained Sehgal.

In light of the likely consequences of loan interest waiver of any format (including interest on accrued interest to a loan during the period of moratorium) on the interest income of bank depositors (many of whom are senior citizens, pensioners and small depositors), the AIBDA impressed upon the RBI that blanket and indiscriminate waiver of loan interest is going to be detrimental to the health of the banking industry as well as to fiscal prudence.

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on June 17, 2020
This article is closed for comments.
Please Email the Editor