PremiumLenders are staring at a massive exercise in recalculating loan dues following a government proposal to waive compound interest during the loan moratorium, even as they work on restructuring vast amounts of stressed loans under central bank supervision.
If the Supreme Court accepts the government proposal, banks and financial institutions will have to rework millions of equated monthly instalments (EMI) for the moratorium period. As the proposal will also apply to those who did not use the moratorium, ways must be devised to compensate them as well.
“This will be a mammoth exercise, considering another exercise of debt recast is already underway and has to be finalized by 31 December. Lenders will have to segregate the normal interest and the interest on interest for the waiver, which at present is woven into the monthly repayment amount," a private sector banker said.
To be sure, what is being proposed is not an interest waiver, but applies to interest on the interest that accumulates in case of delayed repayment.
Analysts estimate that the exercise will cost the government ₹5,000-7,000 crore, assuming that no more than 40% of the overall loans will be eligible for relief. “To bring in parity between a borrower who availed of the moratorium and one who didn’t, a notional amount of interest on interest will need to be reduced from the principal amount outstanding against the borrower who didn’t avail the moratorium," said Anil Gupta, vice-president at Icra Ltd. Since the government will bear the cost of the waiver, the rating agency expects the impact to be minimal on the profitability of lenders.
“The government affidavit on waiver of interest on interest for loan under moratorium is a welcome step. It incentivizes borrowers who have not availed moratorium. But the devil is always in the detail, which is still not out. If the Supreme Court accepts the government’s petition, then we may see a broad-based rally in the banking stocks," said Asutosh Mishra, head of research, Ashika Stock Broking Ltd.
There are some concerns over timely reimbursements from the government. Typically, in the case of farm loan waivers, state governments reimburse banks between a few months to even a year. “The time value of money will be lost by the time the government reimburses. Of course, we will not take a hit on accounting books," said the banker cited above.
Eight sectors will benefit from the government’s proposal—micro, small and medium enterprises (MSMEs), education loans, housing, consumer durables, credit card dues, auto loans, personal and professional loans, and consumption loans.
Some bankers are perplexed that while the government said the waiver is for vulnerable borrowers, it applies to personal loans, credit card dues and even consumer durables of up to ₹2 crore.
“It’s not clear what the intent is, considering a consumer durable loan of ₹2 crore is something one does not come across that often. However, MSMEs deserve the relief as covid has hit them quite hard," a public sector banker said.
The Centre said the new burden would constrain its abilities in pandemic management.
Bearing the cost of paying interest on interest, it told the court, would “naturally have an impact on several other pressing commitments being faced by the nation, including meeting direct costs associated with pandemic management, addressing basic needs of common man and mitigating problems arising out of the loss of livelihoods."
