Court relents, says its concern is only over ‘interest on interest’
Reinforcing the view taken by the banking regulator RBI, State Bank of India (SBI), the country’s largest lender, on Friday told the Supreme Court that grant of interest waiver on term loans for six months due to the Covid lockdown is not “advisable” as it would cast a huge burden on the banks, erode flow of funds to industry and businesses and result in depositors losing faith in the banking sector.
It further said that any such waiver can be granted by the government out of the exchequer and the same cannot be given by the banks where credit is created out of depositors’ funds. “For, any such absolute waiver will create a shortfall and a mismatch between a bank’s assets and liabilities, and will imperil the banks unless the gap is filled in either by government subsidy or by further infusion of capital…The interest of the depositors and the larger public interest has to be kept in mind,” the bank stated.
Indian Banks’ Association (IBA) also supported the SBI, saying the interest waiver has wider ramifications not only for the entire banking industry, but also for the economy of the country. Earlier, the RBI had informed the SC that any “forced” interest waiver on loan moratorium will risk financial viability and hurt banks by as much as Rs 2 lakh crore (1% of GDP).
The Central bank had on May 22 extended moratorium on term loans till August 31 amid the nationwide lockdown due to Covid-19. In March, it had allowed a three-month moratorium on payment of all term loans due between March 1 and May 31.
Meanwhile, the apex court on Friday asked the RBI and the finance ministry to convene a joint meeting within three days to decide whether interest on interest for deferred EMIs during six-month moratorium period from March 1 to August 31 can be charged by banks. It posted the matter for further hearing on June 17. The court also clarified that it isn’t considering a complete waiver of interest but its question is limited to ‘interest on interest only’.
The court had earlier observed that “economic aspect should not be higher than health of people,” and that loan moratorium without interest waiver could be ‘more detrimental’ to the intended beneficiaries of the waiver.
However, the Bench, comprising justices Ashok Bhushan, MR Shah and SK Kaul, said on Friday: “We are doing balancing. The only thing we are wanting is a wider measure. 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.”
“If the RBI reply goes much beyond the query posed by us, there will be a lot of opinions on it. Efforts will be made to sway it one way or another,” the court said.
Seeking to be impleaded as parties in the ongoing petition against recovery of interest accrued on the outstanding portion of the term loans during the moratorium period, both IBA and SBI submitted that allowing moratorium was in the “form of a relaxation and not a complete waiver” and this was just to ease financial stress caused to the borrowers by Covid disruptions.
SBI, which has considerable deposits and loan exposure, in its affidavit contended that more than 91% borrowers have continued to service their debts since March 1 and only a small percentage have opted for loan moratorium. The lender said that “interest amount of loan accounts during the six-month moratorium works out to be around Rs 88,078 crore whereas the interest payable to the depositors during the period works out to be Rs 75,157 crore, besides incurring operating expenses. Thus, waiver of interest obligation would impair the financial stability and viability of the bank.”
According to SBI, the interest paid to its depositors would constitute around 85% of the interest income that the bank will have from the loan account during March 1 to August 31 (including projections for July and August) and it pays compounding interest to its customers on cumulative deposit schemes (STDR/TDR/RD) which constitute 54.84% of its total deposits. Further, the total number of deposit accounts in SBI as on March 31, 2020 is 43.98 crore which is equivalent to Rs 31,24,516 crore whereas the total number of loan accounts is 2.38 crore which is equivalent to an amount of Rs 20,65,484 crore.
“Waiver of interest is gratuitous and amounts to rewriting the arrangement between the borrower and the bank” and not in line with the RBI object,” SBI stated.
A batch of petitions have challenged a part of the March circular with regard to recovery of interest accrued on the outstanding portion of the term loans during the moratorium period amid coronavirus pandemic.