Moratorium: Banks oppose waiver of loan interest – The Economic Times

Clipped from: https://economictimes.indiatimes.com

Moratorium: Banks oppose waiver of loan interest

​The RBI had announced the moratorium, which ends August 31, to protect borrowers hit by the Covid-19 crisis. The lenders opposed any interest waiver and defended the right to charge interest on interest, saying any waiver would set a bad precedent.

MUMBAI: Banks have told the regulator and the government that they are opposed to the waiving of interest during the loan moratorium period, said people with knowledge of the matter. Officials from the finance ministry, the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA) along with a few state-run bank chiefs got into a virtual huddle on Monday to finalise the government’s stand in the moratorium case.

On June 12, the Supreme Court had told the central bank to meet with the finance ministry to decide whether interest will accrue through the moratorium period or be waived. The matter will be heard next on June 17 by the SC.

The RBI had announced the moratorium, which ends August 31, to protect borrowers hit by the Covid-19 crisis. The lenders opposed any interest waiver and defended the right to charge interest on interest, saying any waiver would set a bad precedent. They also pointed out that while there was a moratorium on loans, there was no moratorium on paying interest to depositors.

“Banks led by IBA have presented key points to the finance ministry pertaining to the moratorium and how it will hit their bottom line if any waiver is granted,” said one of the persons. “How is it fair to banks that we have to the compensate borrowers and also keep paying depositors, shouldn’t banks also seek moratorium or waiver to pay interests on deposits?”

The IBA is expected to file a separate application in the matter, arguing that a waiver would be detrimental to the financial system.

“This could deeply impact the role of the financial sector in the economy,” said a senior bank executive. “Waiving interest for borrowers does not take into account that interest has to be paid to depositors. Then there is the question of who all will waive interest. What will private sector banks do? How will other financial institutions manage? What about microfinance companies? Also, what happens to the people who have already paid? All these points will be put in front of the court.”

RBI has estimated a loss of nearly Rs 2 lakh crore if the apex court allows interest to be waived during the six-month moratorium period. This could wipe out banks’ operating profit, according to research firm Motilal Oswal. Another estimate suggested that a waiver could erode the net worth of the banking system by 15%.

“As a commercial organisation, we have a contractual obligation towards our depositors,” said another banking executive. “Stopping banks from charging interest will only hurt depositors because we will not be able to pay them when are not earning. It will cause an asset-liability mismatch for banks. More imporan tantly, it will create a moral hazard for banks as companies which have money may not pay. It will encourage defaults, which is not healthy for any system. Banks can support companies through restructuring but we cannot waive interest. Borrowers have to pay for the system to continue.”

State Bank of India (SBI) had filed an intervention application in the apex court against the plea seeking an interest waiver on term loan instalments postponed during the moratorium period. The joint view of banks is that interest for the six months of moratorium ending August 31 cannot be waived, SBI said. The bench had said the court is trying to strike a balance between the interests of banks and borrowers.

“Our concern in these proceedings is only whether the interest that has been deferred for three months will be added to charges payable later and whether there will be interest on the interest,” it had said.

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