Bank borrowers, especially from the business world, tend to always expect maximum favors from corporate banks. We remember the phrase “Please sir, may I have more” in Oliver Twist, by Charles Dickens, while facing such expectations.
In the wake of the pandemic and the lockdown that followed, the Reserve Bank of India issued a circular on March 27, allowing banks to grant borrowers a moratorium on down payment for three months. An extension of the moratorium period was announced on May 22, making it a six-month moratorium.
Objective of the moratorium
The purpose of the RBI circular was to “ease the burden of debt service due to the disruption caused by the pandemic”. According to the RBI circular, banks will be allowed to continue charging interest during the moratorium period as well, but interest will be collected later.
Now a petition (PIL) has been filed with the Supreme Court that the purpose of the circular would be made futile if interest was collected later and further argued that interest should not be charged during the moratorium period .
The RBI has rightly argued that waiving interest during the moratorium on repayment of term loans would jeopardize the financial health and stability of banks as well as the interests of debtors. The RBI informed that the moratorium decision was aimed at ensuring the continuity of viable businesses and that the regulatory package to defer payment of the loan cannot be interpreted as a waiver.
The RBI also informed that banks are supposed to operate on viable business considerations and are the custodians of depositors’ money and that the actions of banks should be guided by the interests of depositors.
Banks are important for all economic activity in the country and they must be financially viable at all times. Banks cannot be treated as charities to help only borrowers. Expecting banks to lend for free without any interest can never be an acceptable proposition as they have to pay interest to depositors and depositors also cannot expect them to freely park their funds with banks.
When banks accept deposits, it is a contractual obligation. Banks alone cannot refuse to pay interest to depositors. Even when banks grant a moratorium on borrowers, it is the banks ‘discretion, not the borrowers’ decision. Likewise, when depositors invest their money, depositors are lenders to the bank and only depositors can decide whether to waive interest or whether there should be a moratorium on the funds loaned.
When a bank issues a fixed deposit receipt, it is tantamount to a “promise” to repay with interest. Although the language may differ, it contains all the ingredients of a promissory note. Deviation from the payment of interest or principal will not be permitted by law. If a bank does not pay, it will face liquidation.
Even under current RBI guidelines, when a moratorium is granted, banks forgo charging interest during that period, which will affect their working capital. Although banks can be financed by the central bank, they will have to pay interest on these borrowings and there will be serious asset-liability mismatches as well as erosion of results. It would be unwise to expect banks to waive interest entirely instead of collecting it at a later date.
There is no doubt that the public interest litigation was aimed at securing justice for the socially disadvantaged when it was introduced by the late Judge PN Bhagwati. But, lately, PILs are being dropped just to get publicity.
The person (or entity) making the petition must prove to the satisfaction of the court that the petition serves the public interest and is not a frivolous lawsuit brought for monetary gain. The 38th Indian Chief Justice, SH Kapadia, had declared that substantial fines would be imposed on litigants filing frivolous PILs.
This petition asking the banks to waive interest on loans granted should have been treated as a frivolous lawsuit and should have been dismissed at the admissions stage itself. We have to wait and see how the Supreme Court ultimately rules on the petition.
The writer is a retired banker