New Delhi: The Supreme Court on Monday said the Centre’s affidavit on waiving off “interest on interest” on loans up to Rs 2 crore under the moratorium fails to deal with “several issues raised by petitioners” and was not satisfactory.
Therefore, the apex court has asked the government and the Reserve Bank of India to file an additional affidavit within a week. The matter will be next heard on October 13.
What does the government’s affidavit say?
On March 27, the RBI said that banks would be allowed to grant a moratorium on term loan EMIs due between March 1 and May 31. It was later extended for another three months, until August 31. This relief was provided by the central bank to shield businesses from the economic impact caused by the COVID-19-induced lockdown.
The government in its affidavit submitted to the apex court on Friday said that it is willing to waive off compound interest for all borrowers with loans up to Rs 2 crore, specifying that the cost of the waiver would be borne by the government. The government said that the relief will be limited to only vulnerable category of borrowers.
It is proposing to waive “interest on interest” on loans less than Rs 2 crore for education, consumer durables, housing, credit card, auto, consumption, personal loans, and MSMEs.
The affidavit clearly stated that this relief would be applicable to “all borrowers irrespective of whether they availed of the moratorium or not”.
However, it did not provide any clarification on how the relief will be provided to those who have not availed of the moratorium, neither did it distinguish between borrowers who have availed of the moratorium partially or fully.
How much cost is the government expected to bear?
Assuming not more than 30-40% of banks and NBFCs will be eligible for the relief, the government should not exceed Rs 5,000-7,000 crore, BloombergQuint said in a report, quoting Anil Gupta, head, financial ratings at ICRA.
While referring to the costs of a broader interest waiver, the government in its affidavit mentioned that if it were to consider interest on all loans and advances corresponding to the six-month period for which loan moratorium was made available, the estimated amount would be Rs 6 lakh crore.
This would be an exorbitant amount, which explains the need to limit the proposed relief to certain categories and loan values. .
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How justified are the contours of the proposal?
While nobody can argue that vulnerable borrowers need relief and that the cost of providing this relief also prevents further negative ripple effects within the banking system, questions are naturally raised of any taxpayer bailout. And, more importantly, the Rs 2 crore upper limit does raise some questions on whether all borrowers are equal.
“This list is highly unjustifiable as it equates [the] unequal,” says Latha Venkatesh in an CNBC TV18 opinion piece on the proposed relif categories. For instance, an MSME that has Rs 2 crore worth of loans could be called ‘vulnerable’, but nobody would use that word to describe an individual who has taken out a Rs 2 crore loan.
Similarly, a borrower with an education loan has a different financial risk profile compared with the one who has a huge amount of credit card dues, or someone who has taken out a personal consumption loan of Rs 2 crore.
“…A person who takes a Rs 2 crore home loan can hardly be described as vulnerable. Assuming a loan-to-value ratio of 70 percent, the actual cost of the house would be Rs 2.7 crore. By what standards is a person who can afford a Rs 2.7 crore loan ‘vulnerable’. Most income taxpayers wouldn’t be able to afford a Rs 2.7 crore home. The income tax department disclosed in February this year that of the 1.46 crore people who pay income tax, one crore people have an income under Rs 10 lakhs. Most of these persons, may not in their lifetime be able to afford a house costing Rs 2.7 crore. Then why should their taxes be used to subsidise people far richer than themselves?,”
This proposal also questions how justified it is for those who continued to pay EMIs on time and did not avail of a loan moratorium.
What do experts suggest?
Ventakesh suggests that retaining the Rs 2 crore limit for MSME loans but scaling it down considerably for other categories would be a better solution. For home loans, as per the law, Rs 45 lakh is understood to be ‘affordable’.
Ira Dugal of BloombergQuint in an opinion piece suggested that the government should set at least two separate limits for such broad categories as the applicability of this will be wide.