Attorney General Tushar Mehta told a bench of Justices Ashok Bhushan, R Subhash Reddy, and MR Shah that the waiver of interest in all loans for the moratorium period would cause losses of more than Rs 6 lakh crore to banks and financial institutions.
“If banks were to bear this burden, it would necessarily wipe out a substantial and larger portion of their net worth, rendering most banks unviable and raising a serious question about their survival. This was one of the main reasons why the interest exemption was not even contemplated and only the payment of installments was deferred, ”said the Center.
Explaining the adverse impact on the banks’ financial health, the government argued that the six-month interest exemption would completely wipe out more than half of the net worth of the State Bank of India, the country’s largest bank. The Center said it was even impossible for banks to bear the burden resulting from the compound interest exemption without passing this on to depositors or negatively affecting their net worth.
“The only solution, under the circumstances, was for the government to bear the burden resulting from the exemption from compound interest to the defined category of borrowers. This court would be satisfied that the government bearing this burden will naturally have an impact on several other pressing commitments facing the nation, including paying the direct costs associated with pandemic management, health sector, meet the basic needs of the common man and mitigate the problems of the common man that arise from the loss of their livelihoods, ”said the Center.
“The government, therefore, has decided that the exemption from the compound interest exemption during the six-month moratorium period will be limited to the most vulnerable category of borrowers. This category of borrowers, in which case the capitalization of interest will be waived, would be loans for MSMEs and personal loans of up to 2 million rupees, “he said.
The hearing was unfinished and would resume on Wednesday.
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