Borrowers shouldn’t demand interest waiver during loan moratorium period

Bank borrowers, especially from the business community, have a tendency to always expect maximum favours from the financing banks. One is reminded of the phrase ‘Please sir, can I have some more’ in Oliver Twist, by Charles Dickens, while dealing with such expectations.

In the wake of the pandemic and the subsequent lockdown, the Reserve Bank of India on March 27 issued a circular, allowing banks to grant a moratorium to borrowers on payment of instalments for three months. An extension of the moratorium period was announced on May 22, making it a six-month moratorium.

Objective of moratorium

The objective behind the RBI circular was to “mitigate the burden of debt servicing on account of the disruption caused due to the pandemic”. As per the RBI circular, banks will be permitted to continue charging interest for the moratorium period also but the interest would be collected later.

Now a petition (PIL) has been filed in the Supreme Court that the objective of the circular would be rendered futile if interest is levied later and further contended that interest should not be charged during the moratorium period.

RBI view

The RBI has rightly pleaded that waiver of interest during moratorium on term loan repayment would jeopardies the financial health and stability of banks as well as the interest of debtors. The RBI has informed that the decision of moratorium was to ensure continuity of viable businesses and the regulatory package to defer payment of loan cannot be construed as a waiver.

The RBI has also informed that banks are expected to run on viable commercial considerations and are guardians of the depositors’ monies and actions of the banks need to be guided by the interest of the depositors.

Banks are important for any economic activity in the country and they should be financially viable at any point of time. Banks cannot be treated as charitable institutions to help only borrowers. Expecting banks to lend free without any interest can never be an acceptable proposition as they have to pay interest to depositors and depositors also cannot be expected to freely park their funds with the banks.

When banks accept deposit, it is a contractual obligation. On their own, banks cannot deny paying interest to depositors. Even when banks provide moratorium to borrowers, it is the banks’ discretion and not borrowers’ decision. In the same way, when depositors park their money, the depositors are lenders to the bank and only depositors can decide whether to forego interest or whether there should be any moratorium on the funds lent.

When a bank issues a fixed deposit receipt, it is equivalent to ‘promise’ to repay with interest. Though the language my differ, it contains all the ingredients of a promissory note. Deviation from interest or principal payment will not be permitted under law. If any bank fails to pay, it will have to face liquidation.

Even as per the present directions of the RBI, when moratorium is granted, banks forego collection of interest during this period which will affect their working capital. Though the banks may be financed by the central bank, they will have to pay interest on such borrowings and there will be severe asset-liability mismatches and also erosion of bottomline. Expecting banks to waive interest totally instead of collecting at a later date will be imprudent.

Frivolous petitions

There is no doubt that public interest litigation was intended to secure justice for the socially disadvantaged when it was introduced by late Justice PN Bhagwati . But, of late, PILs are being filed merely to get some publicity.

The person (or entity) filing the petition must prove to the satisfaction of the court that the petition serves the public interest and is not as a frivolous lawsuit brought for monetary gain. The 38th Chief Justice of India, SH Kapadia, had stated that substantial fines would be imposed on litigants filing frivolous PILs.

The present petition seeking direction to banks to forego interest for the loans given should have been treated as a frivolous lawsuit and should have been dismissed on admission stage itself. We have to wait and watch how the Supreme Court will finally dispose the petition.

The writer is a retired banker

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