On May 22, the RBI allowed banks to allow an additional 3-month moratorium from June 1 to August 31, 2020, on all outstanding loans while banks have continued to charge interests, sparking a face-off between RBI and SC that is hearing a plea on interest waiver.
Crux of the Matter
Moratorium is a time period in which you don’t have to pay your EMIs and for which you’ll not be penalized nor your credit score would be affected. A moratorium is simply a deferment of the payment to provide relief to borrowers facing liquidity issues and is not any form of concession.
What Is The Issue?
Though the RBI has extended the moratorium period for another 3 months, it has not waived the interest that will be charged. Which simply means that though the banks will not deduct interest from your account, the interest that has been deferred will be added to charges payable later and thus there will be interest on the interest which is the primary issue.
For instance, you have an outstanding loan of ₹5 lakh on which 10% interest is charged annually. Annual interest amount comes to ₹50,000. Interest amount for 3 months (in case of moratorium for 3 months) is equal to ₹12,500. This interest will not be deducted from your account but will be added to your outstanding loan amount. You will be charged interest effectively on the amount of ₹5,12,500.
Once you fix a moratorium, it should serve the desired purpose. Customers are not opting for it because they know they are not getting any benefits.Supreme Court
Supreme Court v/s RBI & Government
A three-judge bench of the Supreme Court on 17th June heard the plea that sought a waiver of interest on loans during the moratorium period. SC calling for centre’s intervention said that ‘charging interest on loans during the period of the moratorium would defeat the very purpose of the scheme.’
The State Bank of India filed an intervention application in the SC against the interest waiver plea and presented a joint view of all the banks that interest for the six months of moratorium cannot be waived. The apex court has also sought inputs from the Indian Banks’ Association (IBA) on whether new sectoral guidelines could be issued to give benefits to extremely distressed sectors.
Defending the government Solicitor General Tushar Mehta opposed waiving off interest on interest citing impacts which would push the banking system towards financial instability and said that banks also have to pay interest to depositors.
SC has sought clarifications from the central government whether banks can charge interest during the moratorium period. The central government will be holding a meeting with the finance ministry and RBI to formalize a view and reply to SC which has deferred the hearing to the first week of August on request of IBA and SBI.
What Does Moratorium Mean For The Banks?
According to RBI, lenders will lose ₹2 lakh crores if interest is waived during the moratorium period. According to data available from large banks namely State Bank of India, ICICI Bank, Kotak Mahindra Bank and Axis Bank, nearly 30% of their outstanding loans come under moratorium. Whereas the banks like Bandhan Bank, Ujjivan Small Finance Bank and Equitas Small Finance Bank catering to small scale businesses have nearly 70%-90% of loans under moratorium.
While moratorium gives much-needed relief during the lockdown period we see the banking sector taking a hit to their NPAs which were seen to be coming down in 2020. Banks would inevitably seek to cover their potential or actual loss of interest income through further cutbacks in the deposit interest rates and thus the depositors would be severely hit if a waiver on interest rates is allowed.
- Jyske Bank, Denmark’s third-largest, launched the world’s first negative interest rate mortgage – handing out loans to homeowners where the charge is minus 0.5% a year. Negative interest rates effectively mean that a bank pays a borrower to take money off their hands, so they pay back less than they have been loaned.
- On 20 February 1980, a black bronze sculpture of 210 cm (6 ft 11 in) height was installed in the lawn of the Supreme Court. It portrays Mother India in the form of the figure of a lady, sheltering the young Republic of India represented by the symbol of a child, who is upholding the laws of land symbolically shown in the form of an open book. The sculpture was made by the renowned artist Chintamoni Kar.
- The Supreme Court building is shaped to symbolize scales of justice with its center-beam being the Central Wing of the building comprising the chief justice’s court, the largest of the courtrooms, with two court halls on either side. The foundation stone of the supreme court’s building was laid on 29 October 1954 by Dr. Rajendra Prasad, the first President of India.