Interest rate waivers for loans during moratorium to harm depositors: AIBDA

Interest rate waivers for bank loans during moratorium will harm the depositors, the All India Bank Depositors' Association (AIBDA) has said adding that interest waiver of any kind will dent the credit culture and also impact the financial health of banks.

Bank depositors will be "severely hit" if a waiver on interest rates is allowed, as banks would inevitably seek to cover their potential or actual loss of interest income through further cutbacks in the deposit interest rates, it said.

It further added that historically, the sovereign covered the loan interest waivers, but in the current situation, a shortfall in revenues both at the Centre and state level will not permit the same.

Meanwhile, on June 12, the Supreme Court had asked the Centre and the Reserve Bank of India (RBI) to hold a meeting within three days to decide on waiver of interest on interest for deferred payments of instalments for loans during the moratorium period announced in wake of the coronavirus-induced lockdown.

"Our query is very limited on whether there can be waiver of interest on interest," a bench of Justices Ashok Bhushan, S K Kaul and M R Shahhad said, adding it will take a balanced view of the matter.

The AIBDA said media reports on the Supreme Court observations have been "extremely unnerving" and added that the same prompted it to make the depositors' stance known.

"We are greatly perturbed about the likely ramifications of the loan interest waiver on the banking sector, and on the prudential financial discipline of the borrowers," the association's secretary Amitha Sehgal said in the statement.

The Supreme Court should dispose-off the petition, it recommended, adding that opting for interest waiver of any kind will dent the credit culture and also impact the financial health of banks.

Credit demand has also gone down and will revive as the lockdown eases, it said, adding that the depositors' money is unlikely to be used for it as the low cost funds made available by the RBI will be deployed.

As the depositors' money is unlikely to be used, "there is a case for protection of depositors' interest by way of freezing the deposit rates at the pre-Covid-19 level," it said, adding it is yet to hear from the RBI on this.