Keeping in mind the adverse fallout of Covid-induced lockdown /economic shutdown, the Reserve Bank of India (RBI) permitted all banks and NBFCs to allow moratorium of three months on payment of installments in respect of all outstanding Term Loans (TLs) as on March 1, 2020. Similarly in respect of working capital facilities availed by borrowers as on March 1, 2020 the lending institutions were permitted to defer the payment of interest for a period of three months. This relief was further extended for another three months up to August 31, 2020.
This moratorium, which was not waiver of loan, only deferred installment and/or interest for a short period. When a borrower fails to pay interest and/or principal on due date this unpaid amount is treated like a fresh loan by lending institutes hence interest has to be charged and paid on this amount also. Charging of interest on interest or compound interest where borrower fails to repay the loan is a routine banking practice worldwide. Levy of compound interest is justified when borrower is delinquent and is not repaying the dues.
However, this relief measure in shape of moratorium was announced by the RBI to tide over the difficulties faced by borrowers on account of external circumstances without any borrower specific internal factor and charging of interest and/or compound interest during moratorium period became a topic of interest for academicians and policy makers.
On behalf of borrowers, a PIL was filed in Supreme Court on efficacy of charging of interest and /or compound interest on moratorium loans. The representatives of Ministry of Finance and RBI rightly contented that not charging interest on loans under moratorium has serious implications for banking sector in particular and financial stability of the economy in general. As banks have to pay interest to depositors at previously contracted rate, the waiver of interest on moratorium loans would impact the profitability of banking system. After deliberations and keeping in view the principle of separation of powers between the legislature, executive and judiciary the apex court directed the Government of India (GOI), to specify the relief measures as prayed in PIL.
Accordingly, Department of Financial Services, Ministry of Finance, GoI vide notification of October 23, 2020 addressed to all banks, NBFCs AIFIs, RRBs, Cooperative Banks and HFCs has announced scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts from March 1, 2020 to August 31, 2020. The borrowers who have loan accounts having sanctioned limits or outstanding amount not exceeding Rs 2 crore (aggregate of all facilities with lending institutes) as on February 29, 2020 and who have availed such facilities under MSME, Education, Housing, Consumer Durable, Credit Card, vehicle, Personal and Consumption loan scheme of lending institutes are eligible for Ex-gratia payment. The account of the borrower should be standard i.e. should not be NPA as on February 29, 2020.
The Ex-gratia payment under the scheme shall be admissible irrespective of whether borrower had fully or partly availed or even not availed of the moratorium announced by RBI. The lending institutes shall credit the difference between compound interest and simple interest to eligible borrowers and lodge a claim for reimbursement latest by December 15, 2020 from the central Government.
The implementation of the scheme of payment of Ex-gratia on both banks and borrowers would be as follows:
- As the Government will bear the burden of the difference of compound and simple interest, as subvention, it would be profit neutral for banks and besides accounts would not be classified as NPA for nonpayment during moratorium period there would be any adverse impact on balance sheet of banks. However, in case Government takes a long time to reimburse the subvention to banks, as in past, it can adversely impact the profitability as well as Asset Liability Management of the banks.
- Helping stressed borrowers is a well-intentioned decision but fraught with unintended consequence as the borrowers who did not opt for the moratorium and were prompt in payment will feel cheated. On the other hand, had the government announced the relief as subvention at the initial stage many well off borrowers, whose have repaying capacity despite Covid related disruptions might also had availed the benefit of moratorium thus putting extra and undesirable burden on government exchequer. The intention behind the policy and end results always remains two ways to judge the efficacy of policies and programs.
- While appraising the loan proposals, especially under retail sector and for issuance of credit card, banks assess income and other liabilities of the borrowers. Going by this analogy person with higher income is likely to avail more number of loans like Housing, car as well as credit card as compared to a person with lower income who may be eligible for only one such loan. Bringing all loans availed by an individual borrower, up to ceiling of Rs. 2 crore, under ambit of ex-gratia payment scheme is regressive is a sense giving more benefits to borrowers with higher income whereas the borrower with lower income who was more stressed during Covid-induced lockdown/shutdown would get less benefit.
Nevertheless, the decision of providing relief in waiving of compound interest on moratorium loans as ex-gratia payment or subvention from GoI is a step towards enhancing cash flow of specified borrowers up to Rs 2 crore and help in giving some impetus to growth in economy.
The author is a Ludhiana-based former banker.Disclaimer: Opinion/facts in this article are author's own and famepunjabi.in does not assume any responsibility or liability for the same.