Moratorium woes

It is reported that the Supreme Court has sought the government’s stand on waiving interest on loan repayments during the moratorium. The Supreme Court has also said that the government cannot hide behind the RBI. It observed that the situation has happened because the government locked down the entire country.

But the lockdown was imposed to arrest the spread of Covid-19. Therefore, the government should not be made responsible for all the accompanying consequences. If the final year students of medicine or engineering could not take their examination due to the lockdown, it does not mean that they should be given their degrees without qualifying for the examination.

Policy decision

The government must take a stand that it is not in favour of waiver of interest and this should be presented to the court in unambiguous terms. This is a policy decision and the government (and the RBI) should be allowed to decide on its (their) own. Whether the government has got powers under the Disaster Management Act to grant the waiver is a different matter. Empowering the government with such power does not mean that it cannot decide otherwise.

The original idea of permitting banks to allow moratorium was to help the banks. The borrowers were facing a genuine difficulty in paying interest and/or instalments due to the lockdown. When they do not pay, the banks are supposed to declare the account as an NPA (non-performing asset).

Banks cannot charge interest on NPAs. They have also to make provision out of profit and loss account. To avoid such eventuality, the banks were allowed to keep the accounts as performing assets under moratorium. The RBI has only permitted banks to allow moratorium, and it has nothing to do with the government.

The interest that is charged by the banks is as per the contract entered into. How can there be a direction either from the court or from the government to deviate from the valid contractual obligation?

Charging interest with monthly rest (monthly compounding) is as per the contract signed by the borrowers. It is difficult to comprehend why the issue cannot be left to the borrowers and lenders to sort out, especially when the terms and conditions of the contract are legally enforceable. And, how can any other authority interfere in it?

If interest on loan has to be waived, who will compensate the banks for the loss? Banks’ financial position does not allow them to absorb this loss. With limited resources, the government also cannot undertake this responsibility.

The RBI had earlier informed that any forced interest waiver on loan moratorium will risk financial viability and hurt banks by as much as ₹2 lakh crore. This is one per cent of GDP. At the present juncture, the government will not be able to compensate banks to this extent.

Interest to depositors

Banks operate on others (depositors’) money. They have to pay interest for the same. Without charging borrowers, how will they service their depositors? Default to pay interest on deposits will be illegal which may even warrant petition for liquidation.

One expects the government to effectively present the case to the court. The case, seeking waiver of interest, should have been dismissed as a frivolous one. The government has also got the option of bringing an ordinance to enforce its policy decision.

The writer is a retired banker

COMMENT NOW