Waiver of EMI interest against basic canon of finance: Centre to SC

Waiver of interest on deferred EMIs during the moratorium period would be against the basic canons of finance and unfair to those who repaid loans as per schedule, the Centre told the Supreme Court on Tuesday.

Reserve Bank of India has however come out with a scheme which provides for extension of moratorium for two years to certain stressed borrowers, the central government informed the apex court.

The Ministry of Finance has filed an affidavit before the apex court which had asked the Centre and the RBI to review the move to charge interest on EMIs and interest on the interest during the moratorium period introduced under the scheme due to the COVID-19 pandemic.

 

During the hearing of a PIL on the issue, Solicitor General Tushar Mehta, appearing for the Centre and RBI, told a bench headed by Justice Ashok Bhushan that the moratorium period on repayment of loans amid the COVID-19 pandemic is extendable by two years. The bench would hear the case on Wednesday.

There cannot be a one-size fit all solution to all the problems faced by the banking sectors, Aditya Kumar Ghosh, Under Secretary with the Ministry of Finance, said in the affidavit.

The government said any post facto change in the terms of the RBI circulars with regard to non-charging of interest during the moratorium period would be unfair to those who kept paying their EMIs.

I respectfully state and submit that ex post facto change in the terms and conditions of the offer of moratorium favouring those who availed of it over those who made the extra effort of repaying as per schedule would be grossly inequitable and patently unfair for those who did not avail of the benefits of moratorium initially or gave it up subsequently.

A waiver of the interest on interest during moratorium would also be against the basic canons of finance, the affidavit said.

The RBI, through its circulars of August 6, has empowered the banks to resolve COVID-19 -related stress and customise relief to individual borrowers through grant of various concessions in terms of alteration in the rate of interest and haircut on amount payable as interest, it said.

The RBI circular also provides for extension of the residual tenor of the loan, with or without moratorium, by up to two years, waiving penal interest and charges, rescheduling repayment,

Converting accumulated interest into a fresh loan with a deferred payment schedule and sanction of additional loan, the affidavit said.

The Centre said that the desired reliefs for eligible borrowers are now available under the RBI framework and in addition, the Central Government through various means has also given commensurate reliefs to sectors affected by COVID-19 in order to mitigate the impact of the pandemic.

RBI on August 6 provided a framework for lenders to implement resolution plans in respect of eligible loans and...the resolution plan may involve any action/ plan/ reorganisation including regularisation of the account by, inter alia, restructuring, which is described as an act in which a lender grants concession to the borrower and which may involve modification in terms of advances/ securities, which would generally include, among others, alteration in payment amount / amount of instalment / rate of interest, the affidavit said.

Besides concessions in the rate of interest, the framework under RBI's circulars of August 6, also permits lenders to allow moratorium of up to two years, it said.

This extended moratorium becomes part of an individualised solution for a borrower and is made available along with other interventions. The RBI framework is specific to the situation arising out of the pandemic. Thus, a borrower, who is fearful of being in default as on 1st September and becoming an NPA soon thereafter, could continue to avail moratorium as a part of the resolution plan implemented in terms of the above circular, the affidavit said.

It referred to the fact that many depositors rely on interests from banks and it would not be good for banks' health of they do not charge interests.

However, it is pertinent that while the standstill applicable to bank loans results in the bank not getting its funds back during the period of the moratorium, the bank continues to incur cost on bank's deposits and borrowings.

It is respectfully submitted that since a moratorium offers certain advantages to borrowers, there are costs associated with obtaining the benefit of a moratorium. Borrowers take a conscious call while opting for a moratorium and many borrowers after understanding the advantage of paying in time did not avail of the moratorium when the initially announced period of moratorium was extended from three months to six months, it said.

Earlier, to mitigate the burden of debt servicing brought about by disruptions on account of the COVID-19 pandemic, RBI, through circulars of March 27, and May 23, had permitted lending institutions to grant a moratorium on payment of all instalments, including interest, of term loans falling due between March 1, and August 31.