The RBI has told the Supreme Court that if the six-month moratorium period on loan repayments is declared interest-free, then losses incurred will be Rs 2,01,000 crore, amounting to close to 1 per cent of the national GDP.
The Reserve Bank of India has opposed waiving off the interest during the moratorium period, insisting that the aim and object of allowing a moratorium is to only defer the payment obligations and it cannot be construed to be a waiver of the payment obligations.
"Since the moratorium period has been permitted for six months, the total interest income thus foregone will be about Rs 2,01,000 crore. This amount is close to 1 per cent of the national GDP. And this is only for the banking system, without counting the NBFCs and all India financial institutions. If the banks are required to forego the above amount, there would be huge consequences for the stability of the banking system," the central bank said in a counter-affidavit.
Against the backdrop of Covid-19 pandemic, the RBI issued a circular in March, which allowed banks to grant a moratorium to borrowers on the payment of installments for a 3-month period. On May 22, this period was extended till August 31.
"Any economic relief has an opportunity cost, and if the argument of the petitioner is accepted, the same would amount to shifting the opportunity cost of the reliefs enjoyed by the borrowers by virtue of moratorium to the lending institutions and depositors of the country," said the RBI. The interest on advances forms an important source of income for banks and after meeting the cost of funds, the banks also need to sustain reasonable interest margins for viable operations, it argued.
The response from RBI came after the apex court queried it on the aspect of interest incurred by the borrowers, if they opted for the benefit of moratorium on loan repayment. "The fact that the waiver of interest is having a far-reaching effect on the economy of the country cannot be ignored. It will be also relevant to mention here that it is a well settled proposition of law that the larger public interest of the economy takes precedence over the individual cases of hardship," the RBI said.
Petitioner Gajendra Sharma, who is aggrieved by the charging of interest on his loan, moved the apex court arguing that the objective of the circular would be rendered futile if interest is levied, and cascading effect will show up in increased EMIs at a later stage. Therefore, the interest should not be charged during the moratorium period.
To this, the RBI replied: "The argument of the petitioner, if accepted, would effectively shift the cost of opportunity availed by the Petitioner and borrowers upon the lending institutions and its respective depositors thereby jeopardizing the interest of all."
Sharma has argued on the right of life, stating that due to imposition of the nationwide lockdown, the means of livelihood are under stress, and he has no means to earn livelihood as he cannot continue to work.
But, the RBI said: "It is well settled that the fundamental right to life includes all the components of right to life; however, the subject matter before this court holds greater importance qua the economy of the country. It is emphatically denied that the circular issued by the answering Respondent (RBI) interfere in any manner with the employment or livelihood of any citizen of this country."
The RBI said that the two-fold intention behind issuing the circular is to mitigate the burden of debt servicing brought about by disruptions on account of Covid-19 as well as to ensure the viability of the businesses.
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