Loan moratorium: Blanket interest relief will wipe out half of SBI net worth, govt tells Supreme Court

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December 9, 2020 6:30 AM

The government had sanctioned over Rs 90,800-crore liquidity injection for the power distribution companies to enable them to pay their outstanding dues to power producers and transmission companies.

It submitted that such case-by-case resolution/reconstruction of individual loan accounts by customising the reliefs to individual borrowers can never be done either by the Finance Ministry or by the RBI.It submitted that such case-by-case resolution/reconstruction of individual loan accounts by customising the reliefs to individual borrowers can never be done either by the Finance Ministry or by the RBI.

The government on Tuesday argued against any further waiver of interest on all the loans and advances given to borrowers during the six-month moratorium period that ended on August 31, saying, “this will mean forgoing an estimated over Rs 6 lakh crore”.

According to the government’s latest affidavit on the matter in the Supreme Court, in the case of State Bank of India (SBI) alone, waiver of six months’ interest would completely wipe out over half of the bank’s net worth which has accumulated over nearly 65 years of its existence.

During the hearing, the apex court bench led by Justice Ashok Bhushan, however, observed that it would not pass any order that will risk the economy going “haywire.” The court had earlier asked the government, Reserve Bank of India (RBI) and banks if power and real estate sectors could be given succour on the debt front.

“If the interest is waived on all the loans and advances for the moratorium period, about all classes and categories of borrowers, the amount to be foregone would be more than Rs 6 lakh crore… if the banks were to bear this burden, it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark over their very survival. This was one of the main reasons why a waiver of interest was not even contemplated and only payment of instalments was deferred,” Solicitor General Tushar Mehta told the court.

“Continued payment of interest (including interest on interest) to depositors is not only one of the most essential banking activities but is a huge responsibility that can never be compromised as most of the depositors are bound to be small depositors, pensioners etc. surviving on the interest from their deposits,” the SG said.

It submitted that banks can’t bear the burden resulting from waiver of compound interest without passing this burden on to the depositors or affecting their net worth adversely, which would not be in the larger national economic interest.

He said that a possible crippling of the banking sector was one of the main reasons for “not even contemplating waiver interest” and restricting relief to “deferment of payment of instalments”.

Mehta said that for every loan account, there are about 8.5 deposit accounts in the Indian banking system. As mentioned by the Indian Banks Association, the SBI has stated that interest amount from borrowers during six months moratorium works out to be around Rs 88,078 crore whereas the interest payable to the depositors during the said period works out to be around Rs 75,157 crore.

Mehta said that the Finance Ministry under the Disaster Management Act, and RBI have acted pro-actively. “The overriding objective was to prevent financial markets from freezing up; ensure normal functioning of financial intermediaries; ease the stress faced by households and businesses, and keep the lifeblood of finance flowing,” the SG stated.

It submitted that such case-by-case resolution/reconstruction of individual loan accounts by customising the reliefs to individual borrowers can never be done either by the Finance Ministry or by the RBI. This exercise involves crores of borrowers and therefore, it can be done only by the respective lenders.

He also said that the banks were fully empowered to resolve Covid-19 related stress and customise reliefs to individual borrowers (other than big borrowers) through a grant of various concessions including altering the interest rate and haircut on the amount payable as interest, waiving penal interest and charges and rescheduling repayment.

“The Kamath Committee set up by the RBI has recommended financial parameters for debt restructuring of 26 sectors affected by Covid-19. For corporate accounts (other than MSMEs with up to Rs 25 crore exposure) which were up to 30 days overdue as on March 1, 2020, the framework of August 6, 2020, provides lenders and borrowers various ways of ensuring viability. At the same time, the prudential framework of June 2019 continues to be available for cases not covered under the August 6 framework,” Mehta told the judges.

The government had sanctioned over Rs 90,800-crore liquidity injection for the power distribution companies to enable them to pay their outstanding dues to power producers and transmission companies.

In the real estate sector, the SG said a government advisory was issued allowing the extension of registration and completion dates of projects under Real Estate Regulatory Authorities by treating Covid-19 as an event of force-majeure.

For Micro, Small and Medium Enterprises (MSME) sector, Mehta said the government had launched, among other things, “an emergency credit line of up to Rs 3 lakh crore, backed by 100% government guarantee to enable the MSMEs to get back to regular operations. The Rs 1.87 lakh crore had been sanctioned. Credit Guarantee Scheme for Subordinate Debt has been launched to help stressed and NPA MSME units. 2% subvention on interest rate is being given for small business loans.”

The apex court is hearing a batch of petitions by various industry bodies, such as Association of Power Producers, various chapters of Confederation of Real Estate Developers Association of India and Shopping Centres Association of India etc. The petitions are seeking industry-specific reliefs in repaying loans in the wake of coronavirus pandemic.

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