Leave interest rates to govt and rbi

Leave interest rates to govt and rbi

The Supreme Court is wrong to push the Centre on interest rate waiver on bank loans, on the servicing of which a moratorium has already been granted by banking regulator Reserve Bank of India (RBI).

The apex court should not step in to arbitrate on policy decisions that are based on economic judgements of the government and RBI.

Reportedly, the petitioner has sought the court’s direction for an interest waiver, saying that deferment of interest payments would not solve the problem of borrowers hit by the economic crisis as accumulated interest would pile up when the moratorium ends.

The SC should not even admit petitions on such matters unless there is a constitutional or legal principle at stake. Loans are a form of capital that need to be serviced, regardless of the borrower’s profitability.

Equity, on the other hand, is a form of capital that needs to be serviced only when profits are made. So, instead of an interest waiver, a State-owned special purpose vehicle (SPV) could infuse equity in large companies, just as a fund of funds proposes to invest in micro, small and medium enterprises.

The SPV could sell its stakes in the future, when these companies turn profitable, and their valuations go up. RBI has said that it would be imprudent to go for a forced waiver risking the financial viability of the banks.

After all, how can banks pay interest to their depositors unless borrowers pay interest on their loans. Breaking off a link in the chain will impair the financial system that hinges on debts being honoured and serviced.

Banks are already saddled with bad loans and in no position to absorb any extra costs. A subsidy to meet the interest payment on loans is not a viable option either as government finances are in bad shape. It is for the executive to find the right solutions.