Depositors are important stakeholders in the process of financial intermediation between savers and investors. Neither banks nor NBFCs can thrive without depositors’ money. They mobilise deposits from savers under contractual arrangements granted under Section 22 (3) of the Banking Regulation Act, 1949. While giving licence to banks, the RBI is satisfied “that the company is or will be in a position to pay its present or future depositors in full as their claims accrue.”

Due to the Covid-19 pandemic, there was a nationwide lockdown for more than two months, leading to a severe disruption of economic activities across the country. To provide relief to the borrowers, the RBI provided regulatory forbearances in several ways, including moratorium in the repayment of both principal and the interest falling due between March and August. During this period of moratorium, banks/NBFCs continued to charge interest on the outstanding loans as their funds continued to be utilised by the borrowers.

Borrowers had the option to avail themselves of deferment if they were willing to bear the burden of interest during moratorium. A bulk of the borrowers have availed themselves of this facility, which implies that they have accepted the terms and conditions of the moratorium. Hence, there is no violation of any contractual obligation.

Unfortunately, a public interest litigation (PIL) has been admitted in the Supreme Court seeking a waiver of interest payments during moratorium. The RBI and the government have been asked to submit their affidavits on the plea of waiving interest during the period of moratorium. According to the RBI, the forbearance relates to deferral of payment, not waiver. As estimated by the RBI, banks’ loss of interest income may be over ₹2 trillion. If banks are forced to waive the interest payment from borrowers, then their financial viability would be at risk, jeopardising the interest of depositors. This would tantamount to violation of the BR Act, which ensures protection of depositors’ interest.

Borrowers’ concerns

The legal issues before the Supreme Court are mainly two — payment of interest during moratorium; and the interest likely to be charged by banks on the interest accrued during this period. Banks are not charitable organisations. Moreover, their financial conditions continue to remain fragile. If they do not earn they may find it difficult to service depositors. Depositors have already suffered due to the cuts in deposit rates by most commercial banks since February 2020.

The Supreme Court seems to have softened its stand on waiver of interest due from borrowers during the period of moratorium. As commercial banks have to service the depositors, the Supreme Court is unlikely to grant a complete waiver of interest during the moratorium. On the second issue, the joint response from the RBI and the government is sought before the next hearing of the PIL in the first week of August 2020.

In the meantime, the RBI has announced that “in order to ameliorate the difficulties faced by borrowers in repaying the accumulated interest for the deferment period on working capital facilities in one shot, lending institutions are permitted to convert the accumulated interest on working capital facilities over the deferment period (up to August 31, 2020) into a funded interest term loan which shall be repayable not later than the end of the current financial year (ie, March 31, 2021)”.

The RBI has to clarify whether the “funded interest term loan” would attract interest payment. In a deregulated regime, the RBI is not supposed to interfere with commercial decisions of banks regarding lending rates.

Adequate relief

Although the RBI has not agreed for an interest waiver, it has compensated both lenders and borrowers by way of low-cost funds under several arrangements such as long-term repo operation (LTRO), targeted LTRO (TLTRO), special refinance facility to NABARD, NHB, and SIDBI, and liquidity facility to the Exim Bank — besides a deep cut in the policy rate. Other regulatory forbearances, favouring borrowers, include reduction of margin requirement, ease of working capital financing, asset classification excluding the period of moratorium, an extension of resolution timeline, rescheduling/staggering of accumulated interest payment, etc.

Borrowers may get relief on the second issue either by the government or by the court order. The government has the power to waive loans/interest under the trying circumstances. During the current year, the shortfall in revenues, both at Centre and State levels, shall be unusually high due to the contraction of the GDP. As the fiscal position of government(s) does not permit the waiver of interest, they prefer to compensate the borrowers in several ways.

In fact, the government’s Atmanirbhar package is largely borrower-centric — collateral-free loans to MSMEs, full/partial credit guarantee for loans to MSMEs by banks/NBFCs, provision for subordinated debt/equity infusion, revision of the definition of MEMEs, etc. It would be unfair to believe that borrowers have been left high and dry during the Covid-19 crisis.

The RBI and the government are concerned about the borrowers and provided several reliefs under different schemes. Hence, the best option should be to dismiss the PIL, as judicial activism is not required in this case.

The writer is a Visiting Fellow at IGIDR and former head of the RBI’s Monetary Policy Department. Views are personal

Related Topics
comment COMMENT NOW