Demand for Interest Waiver | 10 Dec 2020

Why in News

Recently, the Supreme Court (SC) has heard a batch of petitions seeking interest waiver during the loan moratorium period.

  • The Reserve Bank of India (RBI) granted a six-month loan moratorium earlier this year, letting borrowers defer payments on loans and EMIs. The move was intended to provide borrowers relief during the Covid-19 pandemic.

Key Points

  • Central Government's Stand:
    • Huge Cost: It revealed that a blanket waiver of interests on debts incurred by all borrowers for the moratorium period will mean forgoing an estimated over Rs. 6 lakh crore.
    • Possible Impact on Banks: If the banks were to bear this burden, then it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the lenders unviable and raising a very serious question mark over their very survival.
    • Deposits vs. Loans: Continued payment of interest to depositors is not only one of the most essential banking activities but is a huge responsibility that can never be compromised as most of the depositors are bound to be small depositors, pensioners etc. surviving on the interest from their deposits.
      • In the Indian banking system, for every loan account, there are about 8.5 deposit accounts.
    • Use of Financial Resources: There is a need to conserve and rationally use financial resources to deal with the economic effects of pandemic over an uncertain and indeterminate time frame.
      • It also pointed out the sector-specific relief measures taken by the Centre for the small and mid-sized business/MSMEs including from sectors such as restaurants and hotels.
  • Relief Measures Taken by the Centre:
    • For Power Sector:
      • The government had sanctioned over Rs. 90,800 crore liquidity injection for the power distribution companies. This would enable them to pay their outstanding dues to power producers and transmission companies.
    • For Real Estate Sector:
      • An advisory was issued allowing the extension of registration and completion dates of projects under Real Estate Regulatory Authorities by treating Covid-19 as an event of force-majeure.
        • From a contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon occurrence of a force majeure event.
    • For Micro, Small and Medium Enterprises (MSME) Sector:
    • For Small Borrowers:
      • The Centre has decided that the relief on waiver of compound interest during the six-month moratorium period shall be limited to the most vulnerable category of borrowers who availed loan up to Rs. 2 crore.
        • The RBI has classified “big borrowers” having the loan account of Rs. 1500 crores and above and rest as “not big borrowers”.
    • For Big Borrowers:
      • The Kamath Committee set up by the RBI has recommended financial parameters for debt restructuring of 26 sectors affected by Covid-19.
    • Other Measures:
      • The Insolvency & Bankruptcy Code (IBC) was suspended for a period of six months in order to protect companies in distress due to the pandemic being dragged into bankruptcy tribunals.
      • The Security and Exchange Board of India (SEBI) has issued circulars to relax the “recognition” of defaults committed during moratorium.