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RBI Warns SC of Rs 2 Trillion Blow to Banks If Interest During Moratorium Is Allowed to Be Waived

By Priyam Jain      Jun 05, 2020      0 Comments
RBI Warns SC Blow to Banks

Recently the Supreme Court was warned by the Reserve Bank of India of not allowing a plea seeking waiver of interest for the six-month moratorium period on loan repayments, ending on 31st August 2020. The RBI estimated that a ‘forced’ waiver of interest will hurt banks by as much as Rs 2 lakh crore which will indeed have huge consequences for the stability of the entire financial system. 

The reply was filed by the RBI after a notice was issued by the SC seeking response for the regulator or waiver of interest dues plea on the six-month moratorium announced by the central bank. 

Similarly, on 27th March 2020, the RBI has issued a circular asking financial institutions to allow customers a moratorium on loan installments that fell between 1st March and 31st May 2020. Further, this deadline was extended for another three months until 31st August 2020.

It was argued by the RBI that a forced waiver is neither prudent nor appropriate and that the RBI had cautioned that the waiver of interest may risk the financial viability of banks, which would indeed put depositors in jeopardy. 

It was also stated by the Central Bank that the banks must remain sound and profitable to ensure the safety of depositors and the financial stability of the country. It was argued that the interest of loans is an important source of income for banks and to remain viable, lenders need to sustain reasonable interest margins. 

In a report, it was further clarified by the RBI that the borrowing or a loan is a commercial contract between the lender and borrowers and that the interest rate reflects the same. It was further argued by the Central Bank that the benefits of an interest waiver, enjoyed by borrowers, would entail a cost which must not be transferred to banks. It was also asserted that the petitioner had erroneously construed the moratorium as a waiver, whereas it was a deferment of existing and current liabilities. 

The RBI assured that the regulator was aware of the constraints caused by the lockdown and that it was one of the prime factors behind the extension of the moratorium to six months, ending on 31st August instead of 31st May 2020. It was submitted by the apex bank that it had allowed corporate companies to repay accumulated interest, after 31 August 2020, as a funded interest term loan until March 2021.

Most importantly, it was clarified by the RBI that availing benefits under the scheme is entirely as per the lenders' policies and it was added that discretion regarding the eligibility of customers, on-boarding of customer, and manner of interest recovery has been left to the banks and financial institutions. 



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