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The pandemic did not miss the hallowed precinct of the Indian judiciary. It brought normal activities across most courts to a complete halt. The apex court of the country, however, continued taking up important matters and Gajendra Sharma’s plea was no exception.

Gajendra Sharma, an optician from the city of Agra had a small loan of `10 lakh, on which there was a periodic outgo towards repayments. He was relieved to hear about the pandemic debt moratorium that would give him breathing space on his home loan. The RBI reprieve, offered on existing loans from banks, NBFCs, HFCs, MFIs and financial institutions came with three major riders that stated interest is payable on the overdue EMIs unpaid during the period of the moratorium availed, that the interest thus calculated will be added to the unpaid EMIs translating it into a notion of interest on interest and the unpaid EMIs of borrowers will be converted into a loan and repayment tenure would be extended. As an applicant to the moratorium scheme, the relief that Sharma experienced was thus short-lived as the calculations showed that availing the moratorium scheme would actually increase his debt load because of the extra interest outgo. Subsequently, he challenged the loan relief plan announced by the RBI on March 27, 2020, in which he sought a direction from the Supreme Court to declare the notification “as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrower and creates hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution of India.”

On May 26, 2020, the apex court issued direction to the RBI and the Ministry of Finance to respond to the plea challenging the levy of interest. RBI in its reply said that while it was taking measures to provide relief due to the fall out of the Covid-19 pandemic, it did not consider forced waiver of interest as it would risk the viability of the banks which it was mandated to regulate and put the interests of depositors in jeopardy.

Arguments and counter arguments flew thick and fast. The RBI defended its action and upheld the issue of banks’ profitability and bigger interest of the depositors who have put in their hard-earned money in different deposit schemes run by the banks. It pegged loss of earning at around `2 lakh crore for the banking industry - if interest were to be waived. The contrarian view focused on the loss of income due to the pandemic situation and the resultant economic stress faced by the borrowers which was a ‘force majeure’ from the legal angle.     

In the core of this dispute, therefore, lies a simple question which needs to be answered – who bears the brunt by paying the price? The banks are financial intermediaries which connect the depositors and borrowers. Banks lend the money deposited by the depositors to deserving borrowers at a slightly higher rate and pay the depositors at the committed interest rate after keeping a margin to cover for operational costs. Therefore, asking banks to forego interest earning of `2 lakh crore is unlikely to be absorbed in the profit of the banks and very likely to be passed on to the depositors. And depositors are not alien to the economy. They too were impacted by the pandemic. Additionally, depositors in India are highly diverse. They are farmers, workers and pensioners – sections for whom interest earning is a major source of income. Is it fair to bail out borrowers at the expense of these depositors?  

There may be another ramification which needs serious consideration. In the event of lowering of the deposit rates, which is already at a painful level, there may be flight of savers from the bank to other informal avenues of investment that promise higher returns. The country has already seen financial scams involving crores of investors’ money where fly by the night operators have cheated small depositors.

A bank is a commercial institution and is run on commercial considerations and not on magnanimity. Additionally, most of the banking companies are listed in the capital market and therefore answerable to their stakeholders for business decisions and profitability. In this context, RBI’s decision to allow six months’ moratorium, even if being labelled as a half-hearted measure in some quarters, meant regulatory forbearance for banks for maintaining the loan accounts as standard and for borrowers to have an undiluted credit score.

There is one more dimension to the entire episode. The waiver of interest is entirely a call of the central government. It may offer concessions to borrowers for which the entire cost needs to be borrowed by the government and not to be passed on to the lenders. Waiving of farm loans by the government is a case to that point.

The Supreme Court on September 3 provided some relief to stressed borrowers. The bench said that accounts which were not declared as non-performing assets till August 31 this year shall not be declared NPA till further orders. The apex court has accorded some time to the RBI, the central government and banks to put their heads together and finally reply on the matter of waiving interest. The court will hear the matter on September 28 and likely to come out with a verdict. In the event of a ruling in favour of interest waiver, it will create a discrimination between the borrowers who did not opt for moratorium and those who availed it. Because for the latter, that would mean, receiving a benefit through postponement of the fund outgo at no extra cost. Secondly, it will also give an extra edge to the borrower with a tendency to loan default. The apex court should pay heed to the concerns of RBI. It may take a holistic view and allow for a one-time restructuring or apply its mind to bring a better solution acceptable to all the parties.

The author works for Peerless Financial Services Ltd.

 The opinion/s expressed in the article are that of the author's and do not necessarily represent or reflect the policy or position of this magazine.