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At this stage, neither the banking regulator, the Reserve Bank of India (RBI), nor banks have a say in this matter. The final decision of the Supreme Court, where the hearing is on in this case, will have a major impact on the banking sector, or the borrowers, depending on the outcome.
The arguments for and against the interest waiver are strong.
Those who want the waiver says loan moratorium was introduced as a crisis response measure by the RBI. Banks were asked to implement the scheme to help stressed borrowers. Charging interest on interest during the moratorium period will be adding to the burden, not helping them. Hence, the interest amount for the moratorium period should be waived entirely, they say.
But, banks and RBI aren’t in favor of this demand. Banks will have to take a hit of about Rs 2 lakh crore if banks undertake the interest waiver, the RBI has told Supreme Court. After all, banks have to charge interest on loans to pay interest to depositors. That’s the basis of the business itself.
It’s a tricky decision; even for the top Court. As mentioned earlier, the moratorium scheme was conceptualized and implemented as a crisis-response measure. It was clearly stated that banks will be only deferring EMIs for the said period, not waive the loan amount or interest amount. So, RBI and banks have a valid argument to state that it is within the rights of banks to charge interest on the deferred EMIs from the borrower.
But, the question here is that being an emergency crisis-response measure, should the assistance be extended partly or fully? The very reason moratorium has been given is that borrowers are stressed. The economy is in a contraction mode. There is no business revival yet. Massive layoffs are no longer making news across industries. Pandemic has paralyzed the economy.
How can the borrower take up the additional burden of deferred EMIs and compound interest after the cut-off date while his financial situation has not improved at all?
Won’t it add to his woes given that the loan after adjusting the moratorium deferral, will have bigger EMI or extended loan repayment tenure?
For instance, a Rs 45,000 EMI on a Rs 40 lakh loan drawn at 10 percent for 15 years will have an EMI of Rs 48,000 post the moratorium. With fewer cash flows, that’s a substantial burden on the borrower.
If the interest waiver is allowed, banks will have to bear the cost. Capital-starved, NPA-ridden, state-run banks will suffer more as their promoter, the government, has no money to infuse in these lenders. If an interest waiver is not given, borrowers who have opted for a six-month moratorium will see their repayment burden escalating. This, possibly, could lead to more defaults. That's a tough situation.
So what is the exit route from this conundrum? It is best for the court to leave the matter to the RBI and banks, who can use the one-time loan recast provision to help the needy borrowers. The K V Kamath panel is expected to submit the recommendations on the recast scheme soon.
Banks can effectively use this scheme on a case-to-case basis to avert another bad loan crisis. Cases, where borrowers are severely, genuinely hit, and have no cash to repay, can be given an interest waiver while those who can afford to pay can do so. The RBI is the best judge to decide an apt response to solve the interest waiver puzzle.