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Interest-Free Moratorium - RBI's Stance

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June 09, 2020

Why in news?

The Supreme Court has asked the finance ministry for its opinion on an interest-free moratorium.

What is the case about?

  • The RBI has allowed lenders to extend a moratorium on term loans till August 2020-end, following the extension of lockdown.
  • However, the levy of interest during the moratorium period has been challenged.
  • It is said to create hardships to the borrowers and create hindrance and obstruction in ‘right to life’ guaranteed by the Constitution of India.
  • In this light, the Court asked for the government’s opinion on waiver of interest on loans during the ongoing moratorium period.
  • The Court also observed that it could not prioritise economics over health issues.

What is the RBI's stance?

  • The RBI has filed an affidavit in this regard.
  • It has argued that a forced waiver of interest would affect banks badly.
  • It would also endanger the interests of depositors.

How valid is RBI's argument?

  • Covid-19 and the lockdown have resulted in significant hardships for most economic agents.
  • However, the basic rules of economic and financial governance cannot be discarded.
  • A waiver would result in about a Rs 2-trillion hit for the banking system.
  • Lenders are expecting bad loans to rise because of the pandemic.
  • But, a waiver could affect confidence in the banking system.
  • The government has suspended the Insolvency and Bankruptcy Code for 6 months.
  • This is again likely to increase problems for lenders.
  • The Indian banking system was anyway not in good form even before the Covid-19 crisis.
  • So, in all, it is difficult to find fault with the RBI's argument.

How important are the depositors?

  • If the borrowers are given an interest waiver, the banks' role to service the depositors would be at stake.
  • Banks have an obligation to serve their depositors too and not just borrowers.
  • There is no concrete reason why the system should serve only the interests of the borrowers at the cost of the depositors and investors.
  • Their right to life is no less important than that of the borrowers.
  • Thus, it is important to strike a balance.

What other measures has the RBI taken?

  • To be fair, the RBI on its part has taken several steps to support borrowers.
  • Apart from the moratorium, the central bank has lowered interest rates.
  • This has infused significant amounts of liquidity.
  • Besides, it is widely expected that the RBI would allow a one-time restructuring of debt.

What is the way ahead?

  • A waiver of interest for the entire system cannot be a solution.
  • Besides banks, several non-banking financial companies (NBFCs) may not be able to handle this shock.
  • Failure of NBFCs will increase financial-stability risks.
  • However, the government may believe that certain sections of the borrowers need to be given more relief.
  • In that case, the support should come from the Budget, not the banking system.
  • The health of the financial system cannot be ignored, as the government needs a stable financial system and a functioning economy to fulfil its obligations.

 

Source: Business Standard

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