Comment on the Stance of RBI: Larger Public Interest of the Economy Takes Precedence Over the Individual Cases of Hardship

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A writ petition was filed in the Supreme Court under Article 32 of the Constitution. It urged the Court to declare a part of the RBI circular issued on 27th March 2020, as unconstitutional. The circular stated that the interest on loans would continue to add on the outstanding part of the term loans during the moratorium period. The Petitioner argues that the circular has caused hardships to him as a borrower. Moreover, he said that it obstructs his ‘Right to Life’.

The Novel Coronavirus has brought our country to a halt. This transmittable disease has provided unprecedented challenges for national governance. To reduce the spread of the disease, the government declared a nationwide lockdown. It led to putting basic freedoms of movement, employment, and trade, among others on hold.

These restrictions are reasonable, especially in times when the entire nation is fighting this virus. However, it has affected those facing a cash crunch like people who have taken huge loans and are unable to pay interest on these loans. Reduced earnings during this period have added to the problems. As such, the Reserve Bank of India has a vital role in tackling the monetary issues of the people.

Against the backdrop of Coronavirus, the Central Bank had issued a circular in March 2020. This circular allowed banks to grant a moratorium to borrowers on loan repayments. This moratorium was for three months. The RBI further extended this period till 31st August 2020.

Despite this, it is essential to note that the interest rate will still accrue on the principal. The moratorium does not mean a waiver of repayments. Due to non- waiver of interest in such times, people have no way to continue their work and earn a livelihood. Hence, charging of interest defeats the purpose of the moratorium.

Arguments from both sides

Gajendra Sharma filed a plea in the SC challenging the Central Bank’s decision. The Supreme Court gave notice to the RBI on the same.

The Petitioner alleged that charging interest during the moratorium was wrong. He also claimed that it caused hindrance to his Right to Life under Article 21 of the Constitution [1]. Sharma argued that the aim of the circular would be pointless if there is no waiver on interest. It would lead to an increase in EMIs at a later stage. Thus, there should not be charging of interest during the moratorium period.

The RBI noted the consequences that would arise if the Petitioner’s argument was accepted. It said that the cost of the opportunity would shift from the borrower to the lenders and depositors. It would mean putting at risk the interest of all. The interest on loans is an essential source of income for the banks. Moreover, banks need to sustain reasonable interest margins for viable operations. The Supreme Court gave a week to the RBI to file a counter-affidavit. It posted the matter for hearing next week.

Current standing of the RBI on the issue

The Reserve Bank told the Supreme Court that if the interest on six-month moratorium period is waived off, the banks will incur a loss of around Rs 2,01,000 crore. It would also lead to a reduction of the national GDP by 1%. RBI states that the circular issued by it cannot be seen as a waiver of interest on loans. The aim and object of allowing a moratorium was only to defer the payment obligations. The objective of the circular is to ensure the viability of businesses.

In conclusion, the extension of the moratorium will indeed benefit those facing a short-term money crunch. They should make sure to repay the interest as soon as the moratorium period ends. Otherwise, the amount will accrue further interest. Opting for the moratorium could extend their loan tenure by tens of EMIs. It may add to their burden, especially if they have started repaying their loan recently. The people need to calculate the accumulated interest before they take the moratorium. This will enable them to see whether they can pay it back, along with their existing EMIs.


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