Home / Opinion / Views /  A balanced approach to waiving interest during moratorium

In March 2020, the Reserve Bank of India (RBI) allowed a moratorium of three months on payment of instalments of loans and later extended it by three months till 31 August 2020. This meant regulatory forbearance for banks for maintaining the loan accounts as standard, and for borrowers for not impacting the credit rating. The borrowers had the option to pay (the principal amount, interest and the interest on interest) immediately after the moratorium or get it adjusted in future instalments with or without an increase in the repayment period.

The scheme was a half-hearted measure to provide relief to borrowers, as the moratorium was too brief, knowing well the gravity and longevity of covid, and it addressed only the short-term cash flow problems, ignoring the burdening effect of interest on financial performance and viability.

The moratorium has been a contentious issue from the beginning and is currently before the Supreme Court. Covid has been considered as force-majeure and, therefore, the expectation was that the interest on the amount of outstanding should also be waived.

But despite persistent demand, RBI did not agree for waiver for interest or the interest on interest, citing its impact on the financial health and performance of banks. In the affidavit submitted to the Supreme Court, RBI estimated a loss of 2 trillion if the waiver was provided, and added that such a waiver may be detrimental to the interest of the depositors whose deposits aggregated to 133 trillion. It further added that banks intermediate between depositors and borrowers and are expected to run on viable commercial considerations.

The Supreme Court, concerned with the difficulties faced by borrowers under all the categories owing to the worst-ever economic crisis since the Great Depression of 1930 and the lockdown, is exploring a larger and pragmatic view.

RBI’s scheme for moratorium of loan has been in debate from the beginning. It raised questions and needed clarifications. The percentage of outstanding loans opted for moratorium was not as high as expected considering the prevailing level of stress. The moratorium opted was more from borrowers under the salaried class and small businesses and others who were pushed to the hilt by the lockdown. Once it was clear to them that they would be required to pay interest on interest, outstanding loans under moratorium saw a considerable decline. It would be preposterous to assume while the lockdown still in force that this decline was attributed to improved cash flow positions of the borrowers.

RBI and the banks have been resisting before the Supreme Court the waiver of interest and interest on interest for the moratorium period.

This is not unexpected or unreasonable. Pursued hard by RBI and facilitated by the introduction of Insolvency and Bankruptcy Code in 2016, banks were able to reduce their non-performing assets from 11.2% in 2017-18 to 8.5% in 2019-20. They would again struggle, and possibly even more, to restrict and overcome the deleterious effects of the pandemic on their financial health. The issue, however, needs a perspective and mind set necessary for overcoming stress, particularly of the kind infested by covid.

The relationship between a lender and borrower is not cast in stone. It is to be viewed in a dynamic context and is required to respond to the economic, business and regulatory environment surrounding the borrowers. The borrowers and lenders together should agree on measures, including relief and concessions from lenders, so that the project and the borrower are able to negotiate and steer through the stress and remain afloat. If they do not act in a rational manner, the outstanding loan may turn bad, much to the peril of the lenders.

The Supreme Court has granted the government, RBI and banks till 28 September 2020 to reply on their stand on the waiving of interest charged during the moratorium. The government has set a committee under the chairmanship of Rajiv Mehrishi for assessing the impact of the waiver of interest during the moratorium period.

The optimal approach would be to decide on a case-to-case basis, after evaluating the pre-covid and post-covid scenarios. Considering, however, widespread stress across all categories of borrowers, a generalised but discreet approach is warranted.

There has been a general reduction in interest rates since April 2020, giving relief to borrowers under individual and small business categories. No further waiver or reduction may, therefore, be necessary. For eligible entities under the Financial Resolution Framework of RBI, the resolution plan prepared under it may take a holistic view and offer a one-time restructuring, but a separate consideration for waiver of interest may not be warranted.

This approach would be fair to banks as they need to preserve their financial health amid the challenges of covid. It would also be reasonable to borrowers as they would get relief from having to pay interest on interest.

Ashok Haldia is former chief executive officer of PTC India Financial Services Ltd. and adjunct professor at the Institute of Management Technology, Ghaziabad

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