Banks tell SC they need to pay depositors, oppose pleas for interest waiver in moratorium

The banks received support from central government with solicitor general Tushar Mehta submitting that waiving off interest will have a 'cascading effect'.

The Supreme Court of India | Manisha Mondal | ThePrint

New Delhi: Indian banks Wednesday opposed a batch of petitions before the Supreme Court, questioning the Reserve Bank of India’s (RBI) move to charge interest on loans during the period of moratorium that was announced in the wake of the Covid-19 pandemic and subsequent lockdown.

Lawyers appearing for the financial institutions, under the Indian Banks Association (IBA), and the State Bank of India (SBI), told a three-judge bench led by Justice Ashok Bhushan that the benefit of a deferment has to come with a cost as banks were obliged to pay their depositors.

The banks even called the plea for interest waiver “premature in nature”.

The RBI had on 27 March issued a circular allowing borrowers to not pay any equated monthly installments or EMIs for any loans until 30 June. This was later extended to six months. The circular, however, said interests accrued for this period will be payable.

The banks Wednesday got support from the central government, with solicitor general Tushar Mehta submitting that waiving off interest will have a “cascading effect”.

“The moment interest flow stops it will have a serious bearing on depositors. This will lead to a cascading effect,” Mehta told the top court.

The solicitor had held detailed deliberations with officials of the finance ministry and RBI, pursuant to the court’s 12 June direction, asking Mehta to sit with the authorities concerned and work out the modalities for waving interests.

‘Benefit of moratorium must reach beneficiaries’

The Supreme Court bench came down heavily on the government for its inability to find a solution to the issue, even as it gave authorities time to look into the possibility of evolving new guidelines.

“If the benefit of moratorium is announced, the same should reach the beneficiaries,” the court told Mehta.

The solicitor general replied that it was “difficult to waive interests” since there were several categories of debtors, including some who have taken small-time loans and others who have borrowed amounts ranging in hundreds of crores.

Mehta told the court that even banks have a duty of paying compounded interests to their depositors. The moratorium only meant deferment of repayment, he explained.

The judges, however, remained unconvinced with the solicitor’s argument and questioned the logic of charging interest during these difficult times.

“You are giving them a favour by deferring the payment. It is an irony that thousands of crores have been defaulted on NPA accounts but you have to charge interest here. We are aware of the problems if interest is not charged, but a pandemic is not a normal situation,” the bench said.

‘Deferment is merely pushing payment of installments’

Senior advocate Harish Salve, appearing for the IBA, contended that banks were still obligated to pay compounded interests to their depositors.

“We are still in a tunnel. This plea is premature. If all sectors are in distress, then the government may have to provide funding,” he said.

Senior advocate Mukul Rohatgi argued for the SBI and informed the court that about 90 per cent of the borrowers have not availed the moratorium, given the interest regulation.

“The meter for our depositor cannot stop. Their income must go on. A bank does not have its own money. It takes it from depositors. Customers have not opted for the moratorium because they know it does not come for free,” Rohatgi submitted.

To a court query on whether banks can absorb the waiver and if the government can pitch in, Salve said it was difficult to answer at the moment.

“Everybody is in panic. We (banks) do not know the future,” he told the bench, following which the court adjourned the matter for a hearing in first week of August.