The Supreme Court will hear a crucial case on Friday: that of a home loan borrower, who wants the interest on his loan waived for six months when the Reserve Bank of India (RBI) has permitted banks to grant moratorium on loans. The case is crucial for many reasons:
1. RBI says the grant of such a waiver can cost banks Rs 2 lakh crore. While profitability of all banks will be hit, some may be hit way too much, thus endangering their sustainability.
The State Bank of India (SBI) has moved intervention plea in Supreme Court, batting against the allowance of interest waiver. Backing RBI's stance, the country's largest lender cited viability of financial system behind this.
2. The case is being decided without any representation from the most affected party - the depositor. Banks are intermediaries, who take deposits from savers and give it as loans to borrowers. From the interest paid by borrowers, they keep a portion for running the bank and pass on the rest as interest to the depositors. Hence in a case involving waiver of interest, the depositors’ interests need to be heard.
3. The case is even more crucial for non-banking financial companies (NBFCs), who too have granted moratoriums to their borrowers until August. If banks are told to waive interest by the court, it will be logical for NBFC borrowers to request the court for a similar favour. In the case of NBFCs, such a judgment will definitely lead to these companies defaulting on their banks loans as also in their bonds and debentures, which in turn can hurt a large number of mutual fund investors, as the Sebi has pointed out in court in another case.
4. The financial sector is an intimately interconnected and intertwined one and default by one entity (think IL&FS) can have lasting impact on the entire financial sector, which is already fragile. If this fragile financial sector is rocked further, the harm done to the economy as a whole can be severe.
5. If banks and the financial sector are hurt, this directly hits the tax payer since the government may have to bail out or recapitalise public sector banks. Hence, this case also needs to be seen as tilting the balance between the legislature, executive and judiciary. Where taxes may be spent is the call of the legislature, and how to regulate the financial sector is that of the executive. The executive appoints RBI and Sebi as regulators. The courts by impeding the ability of the regulators is trodding on executive terrain.
This last issue of judges straying into executive terrain has repeatedly led to dislocations in specific sectors: The apex court in 2014, cancelled 214 coal blocks allotted by governments over 20 years. The repercussions of that cancellation continue to be felt by both the coal and the power sectors.
Likewise, the cancellation of 2G licences dealt a blow to the telecom sector from which the sector never quite recovered. Both these decisions also had a deleterious impact on banks, increasing their non performing loans.
The role of courts is to interpret the law and ensure justice is done. In the recent AGR (Adjusted Gross Revenue) case involving telecom companies,the court had to interpret what the law said on adjusted gross revenue. But having decided the case, how the government extracts that money from the telecom companies is more an executive decision.
The executive has multifarious responsibilities. It has a policy of digital India. Separately, it is now faced with the need to provide to citizens more telecom services as more people work from home in the face of the COVID-19 pandemic. Having won the AGR case, it is not the executive within its rights to forego the revenues, or allow a delay in payment, in the larger interest of providing telecommunication services.
In the backdrop of the courts activism in the AGR case, one worries if it will also intervene heavily in the regulation of banks in a manner that can stretch this already fragile sector to breaking point.
Indeed the loan waiver case that comes up today is a crucial one.
First Published: IST