A highly unreasonable request

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A highly unreasonable request

Tuesday, 23 June 2020 | Uttam Gupta

Granting interest waiver, in addition to deferment, will amount to discrimination among borrowers who decide to avail the RBI’s loan moratorium and others who don’t

The Supreme Court was against burdening customers with a loan trap while hearing a Public Interest Litigation (PIL) filed by one Gajendra Sharma, demanding a “waiver on interest charged” by a bank citing the relief given by the Reserve Bank of India (RBI) on the payment of equated monthly installments (EMIs) during March and August 31 due to the pandemic. A three-Judge Bench of the Supreme Court observed: “There is no merit in burdening customers, who have opted for the RBI-approved loan moratorium, with additional interest. Once you fix a moratorium it should serve the purpose desired. We see no merit in charging interest on interest.” The Bench, which posted the matter for hearing in the first week of August to allow the Centre and the RBI to review the situation, asked the Indian Banks Association (IBA) to examine whether they could bring new guidelines on the issue of loan moratorium. From this, it would appear that the apex court may be concurring with the petitioner. It believes that without granting interest waiver on the amount remaining unpaid during the moratorium period, the very act of granting it is rendered meaningless. This is reinforced by another observation by the Bench, “On the one hand, you are granting moratorium (on loans) but continuing with interest. It is more detrimental.” As we await the court’s order we need to address some pertinent questions. 

What did the RBI offer to the borrowers? What did it cost the banks and how will interest waiver impact them? How will bank depositors be affected? Let us check a few facts. On March 27, the RBI Governor announced a comprehensive action plan to resuscitate the economy. Among other things, the plan sought to ease the stress of loan repayments on businesses and individuals and this included a three-month moratorium on payment of installments in respect of all term loans outstanding on March 31.

As the lockdown continued much longer than it was initially envisaged on May 22, the Governor announced extension of the moratorium for another three months till August 31. He also allowed those who availed of working capital facilities to convert accumulated interest for the deferment period (March 1 – August 31) into a Funded Interest Term Loan (FITL) which can be paid by March 31, 2021. 

The RBI also eased asset classification norms for all accounts coming under the moratorium. These accounts will be treated as non-performing assets (NPA) from 270 days overdue instead of 90 days overdue as per extant rules. It has also extended the 210-day resolution period for all large, stressed accounts under its June 7, 2019 circular. On its expiry, if banks are not ready with a resolution plan, the Insolvency and Bankruptcy Code (IBC) comes into play by a further 180 days.  

The RBI has thus taken all necessary steps to shield Covid-19 affected businesses and individuals from going into default and negative consequences such as a loan becoming a NPA or proceedings under the IBC that go with it. It has also eased the burden of paying back accumulated interest for the moratorium period. There could not have been a more generous relief package. This has come at the cost to banks who will be required to make additional 10 per cent provision on these so-called “standstill” accounts (albeit borrowers who decide to avail of the moratorium) over three quarters ending March, June and September. Yet, borrowers are dissatisfied and are demanding waiver of interest, too, arguing that the latter is meaningless without the former. The apex court is concurring with this interpretation.

However, this interpretation may not hold ground because the moratorium is actually a “deferment” of existing and current liabilities. It means that for now, keeping in view the prevailing excruciating circumstances, the borrower need not pay for the specified period. But, it does not alter any of the other covenants in his loan agreement with the bank. If, he decides not to pay interest during the moratorium period, “the interest accrued on the unpaid interest amount” will have to be paid by him.

Granting interest waiver (in addition to deferment) will amount to discrimination among borrowers who decide to avail of the moratorium and others who don’t. There are a large number of borrowers in the latter category as can be seen from the following numbers reported by the largest Public Sector Bank (PSB) viz. the State Bank of India (SBI). According to the SBI, over 80 per cent of its retail borrowers did not avail of the moratorium for two out of the first three months initially allowed by the RBI. Further, 90 per cent of such borrowers did not avail of the moratorium for one month. In other words, they continued to pay the EMI. If, the Supreme Court grants interest waiver, are we then to infer that those who have already paid their EMIs will get refund of the “interest on interest” from the bank? If they don’t (very likely) then we will end up with two sets of borrowers viz. one who availed of moratorium and got interest waiver too and the other, who got neither just because he decided to pay.

Plus, loans worth Rs 40,00,000 crore are eligible for the six-month moratorium allowed by the RBI. Taking the average lending rate at one per cent, the interest cost for six months works out to about Rs 2,00,000 crore. This will be the loss to banks if the court allows interest waiver for the moratorium period. But, the buck does not stop here. The banks give loans using depositors’ money. If, the former suffer a loss, this will impact the latter by way of reduction in the deposit rate. There are millions of depositors who depend solely on interest income for their survival. Already, in a declining rate scenario (this was even before the Corona crisis), they have suffered heavily. The interest rate on the Senior Citizen Saving Scheme, which is normally kept immune from market-driven variations, too, has declined by over two per cent in the last couple of years. The crisis has aggravated their woes. To give relief to a certain section of society at the cost of another will be discriminatory.

To argue that deferment of an existing liability per se is no relief is untenable. If, someone is passing through a difficult phase (say, in case of this petitioner whose shop remained closed during the lockdown) and he is exempted from having to pay the EMI during this period, which is what the RBI has done, this by itself is unquestionably a big relief. While he will be happy to get interest waiver as well, that does not take away from the fact that he got a huge relief.

What if the Centre decides to pay for interest waiver? It can do so for PSBs only and this won’t be possible in case of private banks. This will lead to an anomalous situation whereby someone who has taken loan from a private bank won’t get the benefit of interest waiver. That apart, the Government needs to decide whether it can afford this when it needs to keep its scarce (and dwindling) resources for the basic needs of the poorest only. Hopefully, the apex court will see the inherent flaw in allowing interest waiver for the moratorium period and dismiss the demand made by the petitioner. 

(The writer is a New Delhi-based policy analyst)

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