With the Government of India setting up an expert panel to assess the impact of interest waiver on moratorium loans, what began as a COVID-19 relief measure from the Reserve Bank of India (RBI) has become a central government subject.
The finance ministry has appointed an expert committee chaired by Rajiv Mehrishi, former Comptroller and Auditor General (CAG) of India. Ravindra H Dholakia, former member of the RBI’s Monetary Policy Committee, and B Sriram, former managing director of the State Bank of India and IDBI Bank, are the other two members.
The RBI, which is the banking regulator, is missing from the panel. This is a tad surprising since interest waiver and loan moratorium started as an RBI scheme — and not a government scheme to provide relief to borrowers.
In fact, the RBI had already given its estimate on the likely impact of interest waiver on the banking sector — around Rs 2 lakh-crore. According to Macquarie Capital, if interest-on-interest during the moratorium period is waived off, the impact on the banking system could be about Rs 15,000-20,000 crore. This means, there are already some estimates available for the likely impact on interest waiver on the industry. In this backdrop, what exactly is the purpose of setting up a government panel on this issue excluding the RBI?
Remember, this committee is being set up at a time when the case on interest waiver and the waiver of interest on interest waiver is already in the Supreme Court. The court is yet to give a final ruling on the matter, but the judiciary's observations so far suggest that it is of the opinion that interest on interest amounts to a penal action to moratorium customers.
There are no second thoughts that this subject is highly crucial for the banking sector. If the interest amount is waived, banks will have to bear a significant cost. In the present scenario, their financials will weaken further if the government fails to provide adequate capital.
Then there is a fundamental question — how will banks pay depositors’ interest if they don’t charge interest from borrowers. Also, if the interest amount is waived for moratorium borrowers, those borrowers who haven’t availed moratorium and continued with regular payment could raise a question on differential treatment.
As mentioned earlier, the moratorium scheme was conceptualised and implemented as a crisis-response measure. It was clearly stated that the banks will be only deferring EMIs for the said period — and not waive the loan amount or interest amount.
So, the 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.
However, then the counter question comes: 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, and an immediate recovery is out of question.
How can the borrower take up the additional burden of deferred EMIs and compound interest after the cut-off date while their financial situation has not improved at all? Won’t it add to their woes given that the loan after adjusting the moratorium deferral, will have a bigger EMI or extended loan repayment tenure?
While hearing the interest waiver case, the court has also asked the banks not to tag loans that are standard as on August 31 as NPAs till further orders.
Be it the NPA classification or interest waiver, ultimately, the banking sector will have to take the hit. The question is who will compensate these institutions that are already fighting an unprecedented crisis in the wake of an outbreak. Will the government, which has set up the panel, compensate the monetary loss to the banks?
Both the government and the apex court should note that the loan moratorium and interest waiver is an RBI scheme. The regulator is the best judge to decide how the concerns should be addressed on the issue. The RBI's decision should be final on this issue in the best interest of the common depositor.
At this stage, the RBI is only a mute spectator in the whole show. This is unfortunate and doesn’t augur well for the banking sector.
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