The final outcome of the ongoing interest waiver case in the Supreme Court is anybody’s guess. Thousands of borrowers who availed moratorium facility are anxiously awaiting an answer. Borrowers obviously want a full waiver of the interest amount during the six months moratorium period. If there is no waiver, they will be charged compound interest and the loan repayment burden will significantly shoot up. And if that happens then banks will have to take a substantial hit—RBI estimates this at around Rs 2 lakh crore.
It is fair to expect that considering the opposition from the RBI and the government, the SC may stop short of ruling for a total waiver. The court could limit its view suggesting that compound interest, or interest-on-interest, shouldn’t be charged to the borrower as it amounts to a penalty. That suggestion is evident from the court’s observations so far.
A final picture will emerge only after the SC gives its final ruling. Let’s wait till that comes.
It’s a tricky decision even for the country’s top court. As mentioned earlier, the moratorium scheme was conceptualised and implemented as a crisis-response measure. It was clearly stated that banks will be only deferring EMIs for the said period, not waiving the loan or interest amounts. 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 this 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. The pandemic has paralysed the economy.
A Catch-22 situation
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 after the moratorium. With lesser cash flows, that’s a substantial burden on the borrower. If an 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 interest waiver is not given, borrowers who have opted for the six-month moratorium will see their repayment burden escalating. This, possibly, could lead to more defaults. That's a tough situation.
In the meantime, an expert panel appointed by the government to examine the issue of interest waiver seems to be of the view that interest- on- interest shouldn’t be charged to borrowers and that government should bear the burden. Brokerage firm Macquarie estimates the burden of interest-on-interest on the borrower will be around Rs 15,000 crore.
And what does the government bearing the burden of the interest-on-interest mean? It means money will have to come from the pockets of the average taxpayers. If that happens, what ultimately, started as a COVID relief measure by the RBI will eventually become a taxpayer-funded interest waiver exercise. In other words, the COVID-hit borrowers will be bailing out themselves. They will have to be ‘aatmanirbhar’ (self-dependent) while saving themselves from the interest waiver burden.
Taxpayer coming to the rescue isn’t new.
There have been several farm loan waiver schemes in the past where banks have been asked to waiver loans of farmers while the burden ultimately fell upon the taxpayer. Regardless of who will pay for it, ultimately any waiver creates a moral hazard in the banking system. Questions will arise from those borrowers who chose to continue paying their EMIs during the COVID lockdown despite the adverse economic scenario. That’s a dilemma awaiting all stakeholders.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)