Interest waiver will impact banks’ viability: RBI to SC

Central bank sees ~2-trn blow if interest during moratorium is waived

The Reserve Bank of India (RBI) on Wednesday told the Supreme Court that a waiver of interest on loans would impact the financial viability of banks and would be harmful for the interests of depositors as well as the financial sector.

In an affidavit to the apex court, the central bank said the moratorium on loans, which was recently extended till August 31, was in the nature of a deferment and could not be construed to be a waiver.

Giving an illustrative example, the central bank said banks could take a hit of about ~2 trillion if interest was waived for the six-month duration of the moratorium.

“While the Reserve Bank is taking all possible measures to provide relief to the real sector with regard to debt repayments on account of the fallout of Covid19, it does not consider it prudent or appropriate to go for a forced waiver of interest, risking the financial viability of the banks it is mandated to regulate, and putting the interests of depositors in jeopardy,” it said.

The affidavit was in reply to a plea challenging the levy of interest on loans during the moratorium period. On May 23, RBI Governor Shaktikanta Das extended the moratorium by another three months from June 1 for all term loans. The moratorium was originally announced on March 27 for three months starting April 1.

On May 26, the SC had asked the Centre and the RBI to respond to the plea, filed by Agra resident Gajendra Sharma. “The weighted average lending rate for banks as on December 31, 2019, was 10.40 per cent, and the outstanding of term loans was ~59 trillion. Assuming that moratorium is granted to only 65 per cent of the above outstanding, the monthly interest that will be foregone by banks in case the moratorium period has to be declared interest-free will be around ~33,500 crore,” the RBI said.

“Since the moratorium has been permitted for six months, the total interest income thus foregone will be about ~2 trillion. This amount is close to 1 per cent of GDP. And this is only for the banking system, without counting NBFCS and other financial institutions,” the RBI said, adding that if banks were required to forego the amount, there would be huge consequences for the stability of the banking system.