No further extension of loan moratorium, can’t allow interest waiver — says Supreme court
In wake of the coronavirus pandemic, the Reserve Bank of India announced a relief measure to reduce the impact on the financial condition of borrowers by announcing a moratorium on term loans.
On 27th March 2020, RBI announced a loan moratorium for all pending instalments from 1st March 2020 to 31st May 2020. This was further extended to 31st August 2020. Borrowers could voluntarily opt for this moratorium and their credit score would not be affected.
At first, the announcement came as a huge relief for borrowers. Across India, 45% of borrowers opted for the moratorium. But, it came with strings attached. Borrowers had to pay additional interest on their due EMIs, i.e. interest on interest.
Let us understand how this compound interest would have affected the loan repayment. Suppose, a loan of Rs. 70,00,000 is borrowed at a 9% rate of interest for 20 years, the final repayment would have been Rs. 1,51,15,396. If a borrower opted for the moratorium, the interest would continue to accrue and the final amount repayable would be Rs. 1,54,58,049. An extra interest burden of Rs. 1,58,684 would have been added to their overall liabilities.
Once the moratorium ended in August 2020, a number of petitions were filed in the apex court, stating that industries have yet not recovered from the pandemic. They requested for an extension and a waiver on the interest for the period. The supreme court directed the center to clarify its stance on the waiver of interests. In September 2020, the RBI filed an affidavit in the court saying that the extension in the moratorium will vitiate the credit discipline and will adversely impact credit creation in the country. Further, the court ordered that those accounts that were not NPAs till August 2020 shouldn’t be classified as NPAs until further notice. In October 2020, the center announced a waiver of compound interest on loans of Rs. 2 crores or less. This decision would cost all the lenders around Rs. 13, 500 crore to Rs. 14,000 (as estimated and stated by the VP — Financial Sector Rating, Anil Gupta, ICRA).
In December 2020, the center informed the supreme court that a full interest waiver for all the borrowers can lead to damage of Rs. 6 lakh crore and a collapse of the entire banking system in the country. On March 23, 2021, the supreme court stated that no further extension on the loan moratorium is possible. At the same time, additional interest should not be charged during the six months’ moratorium period even on loans above Rs. 2 crore. If charged, it should be adjusted against further payments or refunded back to the borrower. The temporary stay on the declaration of NPAs was also lifted.
The banks breathed a sigh of relief as the government took upon the burden of interest. But, this move will affect average taxpayers as the additional interest will be recovered in the form of taxes.
If the moratorium continued, a rise in stressed assets was guaranteed, which in turn would affect the entire banking sector. Though the credit score of borrowers would not have been affected due to the moratorium, the interest burden would have made the financial crunch heavy, also the recovery of stressed assets for the bank would have been tough. The credit creation would have affected and borrowers would have been afraid to borrow in wake of the compound interest charged on the due instalments during the moratorium.
