NEW DELHI : Banks in India are against a waiver on interest payments on loans as such a move will create an imbalance between borrowers and depositors, Uday Kotak, managing director and chief executive of Kotak Mahindra Bank Ltd, the country’s fourth largest private lender, said on Thursday.
His comments came on a day the Supreme Court criticized the Reserve Bank of India (RBI) for providing a moratorium without considering borrowers’ appeal to waive interest payments during the moratorium.
The court said economic arguments are not stronger than the health of people. “Permitting a moratorium, but offering no relief through interest, is more detrimental," it told the banking regulator.
Following large scale job-losses and weakening finances of individuals, the apex court on Thursday sought the finance ministry’s reply on a plea for waiver of interest on loans during the moratorium period.
Kotak said, “RBI has put out a very clear position that banks are intermediaries. The borrowers have been given a moratorium but banks still have an obligation to pay interest and principal to depositors. Depositor is at the core of the financial system.
“So the rule should have some more balance. RBI has always protected depositors’ interest and this time, too, the same balance is required," Kotak told a news conference organized via video conferencing by the Confederation of Indian Industry (CII).
The Supreme Court was hearing a plea, filed by Gajendra Sharma, seeking a waiver on interest charges, which argued “create hardship to the petitioner being borrower and creates hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution".
The court, on the first day of the hearing, said there are two aspects under consideration—no interest payment on loans during the moratorium period and no interest to be charged on (unpaid) interest during the moratorium.
The court asked why the government and RBI seemed to think natural justice had not been violated when “the government on one hand ceased the working of individuals and on other hand is asking to pay loan interest during moratorium".
A bench led by Ashok Bhushan said these are challenging times and it is a serious issue. RBI, in its reply, estimated a “forced" waiver will cost banks ₹2 trillion, which is about 1% of GDP, which it said will have “huge consequences" for the stability of the financial system.
On 27 March, RBI issued a circular asking financial institutions to allow customers a moratorium on repayment of loan instalments that fall between 1 March and 31 May. On 22 May, RBI extended the moratorium for another three months, until 31 August.
RBI argued a “forced waiver is neither prudent nor appropriate" and cautioned that a waiver may risk the financial viability of banks, which in turn may put depositors in jeopardy. It argued interest income from loans is an important source of income for banks and to remain viable, lenders need to sustain reasonable interest margins.
It also argued that the benefits of an interest waiver enjoyed by borrowers would entail a cost which must not be transferred to banks.
RBI said it is cognizant of the problems, which was why it gave a six-month extension on the moratorium. The court asked solicitor general Tushar Mehta file the reply of the finance ministry at the next hearing on 12 June
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