Asking banks to waive interest will adversely impact financial system: Govt

The finance ministry and the Reserve Bank of India (RBI) told the Supreme Court on Wednesday that banks are playing a crucial role in reviving the economy. Hence, asking them to take a hit on interest rates will adversely affect the financial system as well as economic growth, the apex court was told.

Arguing on behalf of the Centre and the RBI, Solicitor General Tushar Mehta told the three-judge Bench that waiving interest or granting a blanket moratorium on repayment of loans will be a “knee jerk reaction” and not in the best interest of the economy. 

The apex court said it will hear the matter again on Thursday even as a number of sectoral bodies joined hands with the original petitioner demanding waiver of interest, or waiver of interest on interest on the suspended monthly instalments during the moratorium period. 

These included real estate bodies from various states, hotel associations, Association of Power Producers, and bodies representing shopping centres and malls, among others.

The Bench was hearing a plea, challenging levy of interest on loans during the moratorium period. 

The plea, filed by Agra resident Gajendra Sharma, sought a direction to declare the portion of RBI’s March 27 notification as something beyond the RBI’s legal power or authority. That is, to the extent it charges interest on the loan amount during the moratorium period. It said this creates hardship to the petitioner, being the borrower, and is a hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution of India.

The apex court had observed in June that the question is not of waiver of complete interest for the entire moratorium period but it is limited only to interest charged on interest by banks. It had also observed that charging of interests by banks during the six-month moratorium period on term loans was ‘detrimental’.

The RBI, on its part, had submitted that a waiver of interest on loans will impact the financial viability of the country’s financial sector. Also, banks could forego about Rs 2 trillion in interest income if interest is waived off for the six months of the moratorium.

On Wednesday, Mehta said the banking sector in India was a multi-layered structure and passing a blanket order will not produce the desired results.