Waiving of interest will weaken banking sector: Govt tells SC

The Association of Power Producers asked banks to forego profit for this year as it was among the most stressed sectors.

Solicitor General Tushar Mehta on Wednesday told the Supreme Court (SC) that the banking sector plays a vital role in the revival of the economy and a “knee jerk reaction” to simply waive off interests on loans will weaken the sector.

Mehta told a bench led by Justice Ashok Bhushan: “We are not in adversarial litigation here. We are all here to find a solution to the crisis. There were some options available for reviving the economy. One was to write off the interest. The second was a more holistic option in which the first step would be to ease the burden of repayment of loans. Next priority was the revival of sectors so that economy gets moving, restructuring of stressed assets and then the operations of banking sectors,” he said, adding that different sectors of the economy have been affected differently due the Covid-19 lockdown.

Opposing allegations that the Reserve Bank of India (RBI) is acting as the agent of the banks, Mehta said that one has to take into account that banking sector is a multi-layered structure with different types of banks, non-banking financial corporations (NBFC), and passing a blanket order to all will not produce desired results. “Besides, economy mostly runs on not large corporates but on smaller businesses,” he added

On Tuesday, the government had told the SC that another two years of the moratorium could be availed by borrowers under debt resolution (recast) window notified by RBI in early August. This will allow interest rate changes, but a waiver of interest on deferred instalments would be against ‘the basic canons of finance’ and unfair to those who repaid loans as per schedule. A six-month moratorium on term loans announced earlier expired on August 31.

Earlier during the day, borrowers and other petitioner told the apex court that banks were free to restructure loans, but they cannot penalise honest borrowers by charging interest on deferred EMIs under the moratorium scheme. “Public at large is going through a tough time. If the Insolvency and Bankruptcy Code (IBC) could be suspended to give relief to the industry, then why can’t borrowers. Instead of giving respite, the banks are encashing on this mitigating situation,” senior counsel Rajiv Datta argued.

Senior advocate CA Sundaram, representing real estate industry body the Confederation of Real Estate Developers Association of India (CREDAI), argued that suggested that the moratorium should be extended for at least six months and even if the interest cannot be waived off, it should be reduced to a level at which banks pay depositors. The Association of Power Producers asked banks to forego profit for this year as it was among the most stressed sectors.

The Supreme Court is hearing a batch of petitions seeking a moratorium on all loan instalments for the period between March 1 and August 31 as well as a waiver of interest on the unpaid instalments. The SC will continue hearing the case on Thursday.