Economics and welfare | Business Standard Editorials

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There is merit in RBI’s position on loan moratorium

Economic recovery from the Covid-19 shock will need to be carefully nurtured. Policy decisions in the near term will determine the strength and durability of the recovery. Since decisions in a democracy are often influenced by various institutions, it is important that the system works with the objective of bringing things back on track as soon as possible. The possibility of attaining this objective will soon be tested. The Supreme Court has asked for the government’s opinion on waiver of interest on loans during the ongoing moratorium period, and observed that it cannot prioritise economics over health issues. The Reserve Bank of India (RBI) has allowed lenders to extend a moratorium on term loans till August-end. However, the levy of interest during the moratorium period has been challenged because it “creates a hardship to the petitioner being a borrower and creates hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution of India”.

The RBI has filed an affidavit arguing that a forced waiver of interest would affect banks and endanger the interests of depositors. Now the government needs to file its response. It’s difficult to find fault with the banking regulator’s argument. While it is correct that Covid-19 and the lockdown have resulted in significant hardship for most economic agents, it does not mean that the basic rules of economic and financial governance need to be discarded. A waiver would result in about a Rs 2-trillion hit for the banking system. Although lenders are expecting bad loans to rise because of the pandemic, a waiver could affect confidence in the banking system. It is important to recognise that banks have an obligation to serve their depositors too. The government has suspended the Insolvency and Bankruptcy Code for six months, which is likely to increase problems for lenders. The Indian banking system was anyway not in great shape even before the Covid-19 crisis.

To be fair, the RBI on its part has taken several steps to support borrowers. Apart from the moratorium, the central bank has lowered interest rates and infused significant amounts of liquidity, and is widely expected to allow a one-time restructuring of debt. The banking regulator is doing whatever it can for borrowers, but a waiver of interest for the entire system cannot be a solution. Besides banks, several non-banking financial companies (NBFCs) may not be able to handle this shock. Failure of NBFCs will increase financial-stability risks. Furthermore, there is no concrete reason why the system should serve only the interests of the borrowers at the cost of the depositors and investors. To be sure, their right to life is no less important than that of borrowers. After all, the banks have contractual obligations to both the borrowers and depositors. If the borrowers are given an interest waiver, how will banks service the depositors? Thus, it is important to strike a balance. However, if the government believes that certain sections of the borrowers need to be given more relief, the support should come from the Budget, not the banking system. It is important to appreciate that the health of the financial system cannot be ignored. The government needs a stable financial system and a functioning economy to fulfil its obligations.

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