Interest on Interest Waiver; Relief for MSMEs and Small Borrowers

The Re-Beginnan | Vol.2 | Issue 20

What’s the Deal?

A moratorium of 6 months (March 2020 — August 2020) was given to the borrowers by the RBI for the repayment of the loan taken amid the coronavirus pandemic. But the banks and housing finance companies were charging interest on principal + interest, this meant the repayment period got extended by over 6 months.

On 2nd October 2020, the Centre informed the Supreme Court that ‘interest on interest’ on loans up to 2 crores will be waived off for the 6-month (March 2020 — August 2020) repayment moratorium. The burden arising from waiver of ‘interest on interest’, or compound interest will be borne by the government, keeping alive the tradition of handholding small borrowers, said the finance ministry in its affidavit. Also, for outstanding credit card loans, the relief will be substantial as the interest rates are higher, ranging between 19.5 per cent and 42.4 percent. The verdict in regards to the same is still pending in the supreme court.

Earlier, the Centre and RBI contended that it would be unfair to waive off ‘interest on interest’, as it would be at odds with the interests of the stakeholders, mainly to the depositors and people who paid their dues. But following the recommendation of an expert committee headed by Comptroller & Auditor General Rajiv Mehrishi, the Centre reversed its stand.

Dissecting the Affidavit

Eligibility — For borrowers with a loan of up to 2 crores

Category of Borrowers Eligible for Waivers MSME loans, education, housing, auto, consumer durable loans, credit card dues, personal loans to professionals and consumption loans.

Eligibility Time Period — Moratoriums opted for between March 2020 — August 2020

Total Estimated Benefits to Borrowers pertaining to the Above Categories — INR 5000 core — INR 6000 crore

Caveats

- Waiving off interest completely under moratorium was not even considered, as that would amount to a hit of over 6 lakh crores which would wipe out the net worth of banks and make them unviable. The chain of depositors, being more in number than the borrowers, cannot be broken.

- Modality for availing benefits for those who were paying EMIs or credit card dues during the moratorium is not yet known.

- The risk profile of all borrowers with a loan of up to 2 crores is forcibly made equal to simplify the category of borrowers. E.g. — A 2 crore auto loan has a different financial and risk profile than a 2-crore business loan.

- It will be unfair to the disciplined EMI payers who paid their installments on time, irrespective of the moratorium. As noted in the past, waiver of farm loans has led to corrosion of credit discipline among farmers, deteriorating the credit culture along with weak finances among them.

- Non-banking Finance Companies (NBFC) and Micro Financing Institutions (MFI) have been kept out of the ambit of the affidavit. Keeping NBFCs & MFIs out is unfair as both have retail and small business borrowers and it goes against the government’s own statement that it wants to support small businesses.

- INR 5,000 crore — 6,000 crores that the government will shell out for the waiver will eventually be borne by the taxpayer. Looking at this arrangement, the only actual beneficiary here would be the banks as they will get their interest back and the common man (taxpayer) will pay for it.

The Way Forward…

Relief will be given to all the borrowers irrespective of whether or not they availed the moratorium, said the affidavit. This raises a question on the modalities of how the relief will be dispersed as some borrowers availed a one-month moratorium, some five and some didn’t avail the moratorium at all. In the meanwhile, the supreme court has passed an order to keep all accounts that were standard as on 31st August as standard and not designate any as NPAs until the final verdict is out.

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