IBA asks banks to refund compound interest to all borrowers: Report

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The Indian Banks' Association (IBA) has asked banks to refund any compound interest or penal interest collected by them. The association, in a letter dated March 26, told banks that it will ask the government to compensate lenders for the refund payable.

The IBA directed member banks to exclude the moratorium period while calculating the number of days for deciding the status of a non-performing loan, as per a report by The Times of India.

"The moratorium period (March 1-August 31, 2020) to be excluded for reckoning number of days for deciding NPA status under prudential norms. This is regardless of whether the moratorium was requested or not by the borrower," the IBA told banks, according to the news report.

Read | Supreme Court ruling on loan moratorium case: 10 key questions answered

As per the current RBI norms, banks have to increase the provision for a stressed loan as the days past due increase. The first level of provisioning (usually 15 percent of the loan amount) is made when it is 90 days overdue.

The Supreme Court (SC) had on March 23 passed its final verdict in the loan moratorium case, stating that it cannot allow waiver of complete interest and extension of the moratorium.

The apex court further ruled that there shall be no interest-on-interest or compensation interest during the moratorium period for all borrowers, irrespective of the loan amount. If any such amount has been collected, it shall be refunded.

The government had earlier indicated that it will compensate banks for the interest-on-interest waiver. But, since the court has ruled that all borrowers, including those above Rs 2 crore, should get the benefit of compound interest waiver, it is to be seen if the government takes up the entire burden or passes on some of it to banks.

Rating agency ICRA estimates that the waiver of compound interest on all loans will cost the government another Rs 7,000-7,500 crore.