The interests of banks and depositors should be balanced with that of borrowers while deciding on moratorium

The Supreme Court has always upheld the law and stood for fairness and equity, something that the country is justifiably proud of. In the quest for fairness though, it is possible that the lines drawn by the founding fathers of the Constitution separating powers between the legislature, executive and the judiciary are sometimes crossed, inadvertently. This is something that the Court needs to be watchful of as it hears the case relating to moratorium on loan repayments by Covid-affected entities and whether ‘interest on interest’ is justified. The arguments being advanced in this case seem to be getting more and more divorced from the ground realities of commercial banking. The petitioners are persistent that banks, which have already granted borrowers six months’ time to service their loans to tide over Covid, ought to extend this privilege longer and waive interest as well. They have also implied that banks are morally wrong to charge ‘interest on interest’ during such difficult times. Lobby groups such as real estate are demanding that given the force majeure situation, banks ought not to treat the accounts of defaulters as NPAs, even if they breach the loan covenants.

The Centre has filed an affidavit offering to foot the bill on the ‘interest on interest’ component for small borrowers and MSMEs with outstanding loans of up to ₹2 crore. The RBI, which is the banking regulator, is justifiably upset, and argues that such concessions would vitiate the credit culture and that a more durable way to provide relief lies in case-to-case loan restructuring, as suggested by the KV Kamath Committee. The modalities of relief, if any, are best left to the Centre and the RBI. Banks are nothing but a conduit between depositors and investors who have money to spare, and businesses and households who have an immediate need for it. Interrupting the virtuous cycle between bank deposits and loan repayments and lending of these funds can escalate systemic risks and shake depositor confidence in the already fragile banking system. The government has estimated that the bill for waiver of interest on all loans during the moratorium period will be a whopping ₹6 lakh crore. The net worth of banks will be substantially wiped out if they are forced to bear this burden.

Bringing an ethical dimension into the charging of ‘interest on interest’ ignores the fact that compound interest is only fair compensation for the time value of money — lenders charging compound interest also fork out similar compound interest to the depositors and investors whose funds they source. Allowing borrowers to hijack the debate on the hardships caused by Covid and to extend one-sided stimulus packages ignore small savers and depositors, whose interests also the Court has to protect. The RBI, as the banking regulator, is best placed to take into account the competing interests of depositors and borrowers, and the health of the banking system.

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