Can't give any further relief: Centre and RBI to Supreme Court on moratorium

The Union government and the Reserve Bank of India have told the Supreme Court that they cannot go beyond the decision already taken to bear the burden of compounding interest during the six-month loan moratorium for MSMEs and personal loans up to Rs 2 crore.

"Any waiver of interest on interest, or compounding, will entail significant economic costs which cannot be absorbed without serious dent of their financials," the RBI said.

This, in turn, will have huge implications for the depositors and broader financial stability, the banking regulator said.

Read: RBI appeals to Supreme Court to allow NPA classification

The consolidated response was filed to a PIL by Gajendra Sharma for waiving interest on interest on loan moratorium that ended on August 31.

The Union government, by its October 2 affidavit, had informed about the decision to bear the cost of the ‘interest on interest’ on loans up to Rs 2 crore.

The discretion on the eligibility of this benefit was left to the lending institutions.

RBI also said a moratorium exceeding six months could vitiate overall credit discipline.

"RBI has taken a balanced view, taking into account the interest of depositors, borrowers, real sector entities and banks. Financial stability and economic growth of the country were also kept in mind while arriving at its policy decisions," it said.

Also Read: Worst over: RBI sees silver lining in economic growth

The RBI asked the top court to modify the September 4 order, restraining the classification of accounts into non-performing accounts.

It also referred to the K V Kamath panel which had made recommendations for 26 sectors that could be factored by lending institutions while finalising loan resolution plans. The panel had said that banks could adopt a graded approach based on the severity of the coronavirus pandemic on a sector.

The Union government, for its part, said fiscal policy was its remit and the decisions have already been taken in the specific context of Covid-19 pandemic and the vulnerability of the specific class of borrowers. Such decisions, including making of expenditure commitments flowing from such decisions, follow a well-established procedure, which cannot be dispensed with, it said.

In unprecedented circumstances, the decisions were taken keeping in mind the severe financial stress globally as well as nationally and while ensuring that the sources are utilised so that the national economy and the banking sector can withstand the present financial situation, the duration of which is unknown, the Union government said.