BackGovt’s interest waiver is too little, too late
Since a PIL has been filed in the Supreme Court on the issue of waiver of “interest on interest” or compound interest during the moratorium period on loan repayments between 1 March and 31 August 2020, the matter is beyond the Reserve Bank of India (RBI) now
PremiumSince a PIL has been filed in the Supreme Court on the issue of waiver of “interest on interest" or compound interest during the moratorium period on loan repayments between 1 March and 31 August 2020, the matter is beyond the Reserve Bank of India (RBI) now. Some people who have been going through financial difficulties in the lockdown phase will get relief from the refund of the compounding interest on loans. However, when it comes to the overall aspect of compounding of interest, some of the issues got missed out in the debate.
Firstly, when the moratorium was initially announced by the RBI for three months, the modalities were not announced. It was not clarified that for those three months, or another three months after extension, the EMIs were not being excused or frozen. The borrower was only allowed to not pay the EMIs for those six months. The public at large had no clue that if six EMIs are not being paid now and will be paid at the end of the loan tenure after, say, 10 years, it is not that six more EMIs will be payable after 10 years. Interest will be charged for 10 years, the amount will be compounded for 10 years and the number of additional EMIs payable after 10 years will be much more than six, depending on the rate of interest, amount, tenure and other factors. This awareness should have been run as a media campaign by RBI and banks. Only people in utter difficulty on cash flows would have opted for it, post the awareness. People who opted for it thinking it is a holiday and that “those 6 EMIs" can be paid later would not have opted for the moratorium.
Secondly, some banks put in the automatic “opt in" system for some time. That is, unless the borrower opts out of it, it was assumed that s/he has opted for moratorium. This was in a way forced on those borrowers as they did not have full awareness about the interest that will be charged for a long period.
Thirdly, there was lack of clarity among bank employees themselves and customers had little guidance. Calculations about the additional interest and EMIs were built into the “system" of the banks, but many employees were not clear on the logic behind the calculations. That left borrowers with little clarity.
The intentions of RBI behind allowing the moratorium are appreciable, as it meant to give relief to people in times of stress. However, the way it was implemented, in terms of awareness and communication, did not lead to fulfilment of the noble objectives. To give an analogy of the point we are making, let us say passengers of a flight or train are stranded at the airport or station for some reason. It is then announced that food is being offered, which is a noble gesture in the situation. However, as per the rules of the flight or train service, the food is chargeable at a high cost (assume this for the sake of discussion). Passengers would assume that the food is either free or chargeable at a reasonable cost, unless it is loudly announced. On top of it, if the food is served to people (automatic opt in) who are in two minds and are not aware of the high cost and later the tax on the food is waived off, it will still remain high cost. Even without compounding, interest for a long period is sizeable.
Moreover, the court has gone by the humanitarian angle, in times of stress, which is noble. However, the humanitarian logic has been applied to borrowers only, not depositors. It may be argued that borrowers don’t have money, which is why they have borrowed, and depositors have money which is why they have deposited. Even among borrowers, there are well-to-do people who have taken a loan for, say, buying a house. Among depositors, there are senior citizens who are managing only on the deposits they have. In a situation of easing interest rates, they are stressed, but their plight has not been considered in this debate. The bank cannot increase the contracted rate of interest just because the depositor is in stress.
Thankfully, the burden of waiver of interest on interest is being borne by the government and not the banks. That also, by the way, is taxpayers’ money.
Joydeep Sen is a corporate trainer (debt markets) and an author.
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