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Focus: GS-III Indian Economy

Why in news?

Petitions were filed before the SC regarding the waiver of interest rates accrues during the 6 month period offered by RBI due to COVID 19. The Court asked the RBI and the Finance ministry to respond regarding the same.

Two main issues: the first was whether interest should be charged during the moratorium period or not; the second issue was whether interest should be charged on the accrued interest.

What RBI said?

RBI said it does not consider it prudent or appropriate to forcefully waive interest, which would risk the financial viability of the banks, which the RBI said are already reeling under the pressure of Bad loans. RBI is mandated to regulate the banks and it has to protect the interests of the depositors.

Supreme Court’s Views

The Supreme Court bench even observed that a moratorium without an interest waiver is detrimental to the borrower. However, such a waiver on the interest accrued would have some major unpleasant outcomes.

Negative Impacts of a waiver

  • It weakens the credit culture, even who are capable would be discouraged
  • Another unfavourable outcome is that waivers would hurt the already battered balance sheet of banks, even as it would further stymie the ability of lenders to give attractive returns to depositors.’
  • An increasing pile of bad assets and waivers typically limit a bank’s ability to pass on interest rate reductions faster.

-Source: Livemint

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September 2022