On Tuesday, the government argued against in regards to the six-month moratorium period which ended on 31 August said that any further waiver on interest on loans and advances and said that “this will mean forgoing an estimated over Rs 6 lakh crores”.
Waiver of six months’ interest in the case of State Bank of India (SBI) alone would completely wipe out over half of the bank’s net worth which has accumulated over nearly 65 years of its existence, according to the government’s latest affidavit on the matter in the Supreme Court.
What would the waiver mean?
The court had earlier asked the government, Reserve Bank of India (RBI) and banks if power and real estate sectors could be given succour on the debt front. During the hearing, the apex court bench led by Justice Ashok Bhushan, however, observed that it would not pass any order that will risk the economy going “haywire.”
“If the interest is waived on all the loans and advances for the moratorium period, about all classes and categories of borrowers, the amount to be foregone would be more than Rs 6 lakh crore… if the banks were to bear this burden, it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark over their very survival. This was one of the main reasons why a waiver of interest was not even contemplated and only payment of instalments was deferred,” Solicitor General Tushar Mehta told the court.
“Continued payment of interest (including interest on 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,” the SG said.
Though it is not in the public larger national economic interest, banks cannot bear the burden of compound interest waiver and hence must pass that burden on to the depositors.
“Deferment of payment of instalments” was only feasible as contemplating waiver interest would possibly cripple the banking sector.
As mentioned by the Indian Banks Association, the SBI has stated that interest amount from borrowers during the six months moratorium works out to be around Rs 88,078 crore whereas the interest payable to the depositors during the said period works out to be around Rs 75,157 crore.
SG stated “The overriding objective was to prevent financial markets from freezing up; ensure normal functioning of financial intermediaries; ease the stress faced by households and businesses, and keep the lifeblood of finance flowing.”
According to him banks were fully empowered to resolve Covid-19 related stress and customise reliefs to individual borrowers (other than big borrowers) through a grant of various concessions including altering the interest rate and haircut on the amount payable as interest, waiving penal interest and charges and rescheduling repayment.
Industry specific measures by Government:-
Rs 90,800-crore liquidity injection had been sanctioned by the government for the power distribution companies to enable them to pay their outstanding dues to power producers and transmission companies.
By treating Covid-19 as an event of force-majeure , an extension of registration and completion dates of projects under Real Estate Regulatory Authorities was issued. Also a credit line backup with government guarantee is launched to enable MSMEs to get back to regular operations.
The apex court is hearing a batch of petitions by various industry bodies, such as Association of Power Producers, various chapters of Confederation of Real Estate Developers Association of India and Shopping Centres Association of India etc. The petitions are seeking industry-specific reliefs in repaying loans in the wake of coronavirus pandemic.