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Larger Public Interest of the Economy takes precedence over the Individual cases of hardship: RBI


A writ petition was filed in the Supreme Court under Article 32 of the Constitution. The petitioner urged the Court to declare a part of the RBI circular issued on the 27th of March, 2020 as unconstitutional. The circular stated that the interest on loans will 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 and creates an obstruction to his 'Right to Life' under Article 21.


The Novel Coronavirus has brought our country to halt. This transmittable disease has provided unprecedented challenges for national governance. To reduce the spread of the disease, the government declared a nationwide lockdown. This led to putting basic freedom of movement, employment, and trade among others on hold. These restrictions are reasonable especially in times when the entire nation is fighting this virus. But these restrictions have affected those facing a cash crunch. People who have taken huge loans and are unable to pay the interest on loans due to reduced earnings during this period are the most affected. The role of the Reserve Bank of India becomes vital in tackling the monetary issues of the common people, especially during a pandemic.


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 for a period of 3 months. This period was further extended by the RBI till August 31.


But it is important to note that the interest rate will be charged on the loan outstanding during this period. The extension of loan EMIs does not mean a waiver on repayments as interest will continue to get accrued on the principal outstanding. 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 during the moratorium will defeat the purpose of allowing moratorium on loans.


Arguments from both sides:

A plea was filed in the Supreme Court by Gajendra Sharma (petitioner) challenging this decision of the central bank to charge interest on loans during the moratorium period. A notice was issued to the RBI by the Supreme Court for the same. The petitioner said that “this action of charging interest during the moratorium period is completely wrong and has caused hindrance and obstructed his right to life guaranteed by Article 21 of the Constitution.” Sharma argued that the aim of the circular would be pointless if there is no waiver on interest, leading to an increase in EMIs at a later stage. Thus, there should not be charging of interest during the moratorium period.


To this, RBI replied "if we accept the argument of the petitioner, it would shift the cost of opportunity availed by the Petitioner and borrowers upon the lending institutions and its respective depositors. This would mean putting at risk, the interest of all and that the interest on loans is an important source of income for the banks. Another reason was that the banks also need to sustain reasonable interest margins for viable operations.” The Supreme Court gave a weeks’ time to the RBI to file a counter-affidavit and posted the matter for hearing next week.


Current standing of the RBI on the issue:

In the latest development, the Reserve Bank has told the Supreme Court that if the interest on a 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 in the national GDP by 1%. RBI goes on to state that the circular issued by it cannot be seen as a waiver of interest on loans because the aim and object of allowing a moratorium was to only defer the payment obligations. The RBI said that the intention behind issuing the circular is to ensure the viability of the businesses.


Conclusion:

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 get added to their loan outstanding and start collecting interest. Opting for the moratorium could extend their loan tenure by tens of EMIs. This may add to their loan burden, especially if they have started repaying their loan recently. The point being, people should 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.

ABOUT THE AUTHOR

Jay Shah is currently studying law from the NMIMS School of Law Mumbai.

Edited by: Swati Tolambia

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