moratorium interest waiver

Centre’s ‘Interest on Interest’ Waiver Proposal Will Add Costs, Spark Litigation: Bankers

The proposal aims to waive the compounded interest component on small business loans and some personal debts from March to August.

Mumbai: Bankers fear the government’s decision to waive some interest payments on loans under a COVID-19 support plan will create unnecessary work for lenders and lead to more litigation, without providing much of a boost for the sagging economy.

In an October 2 filing with the Supreme Court, seen by Reuters, the government said it is amending a controversial clause in a relief plan that allowed distressed borrowers to skip repayments for six months but then charged them “interest-on-interest” on the delayed payments, putting them deeper in debt.

The change will waive the compounded interest component on small business loans and some personal debts from March to August.

The government will bear the cost, which could be as high as $1 billion, according to analysts.

But for lenders saddled with over $120 billion of bad loans and a coronavirus-induced collapse in demand, the move will further pressure already stressed balance sheets.

In the case of a similar scheme for farm loans, banks typically need to wait nine to 24 months to get the funds from the government, two bankers said.

Lenders also will need to recalculate millions of loans, according to interviews with four bankers and a lawyer.

“Getting the money back from the government is a painful exercise,” said a senior banker at one of the NBFCs.

“At the end, a lot of work will happen, nobody will be happier and the government will be poorer.”

A finance ministry spokesman declined to comment, citing ongoing legal proceedings.

Also read: Explained: The Upside and Downside of the Centre’s Proposal to Waive ‘Interest on Interest’

Banks’ legal costs are also on the rise as lawsuits pile up.

“The state-owned banks may show government support, but the private lenders are in it for the profit. They will have different calculations and those calculations will be challenged by the government,” said the lawyer.

A banker at a private lender added: “That is the problem with such waivers, because where does it end?”

Bankers are also concerned that waivers may distort the culture of lending in India and argue that there are other ways to help borrowers who are in need, such as providing subsidies or loan restructuring.

“Now, in case of a flood or any other situation, even borrowers who can pay may not be keen to do so because they know the government will step in to rescue them,” said a senior banker at a public sector lender.

(Reuters)

Moratorium Period on Loan Repayment Can Be Extended by 2 Years: Centre, RBI Tell SC

The apex court had earlier asked the Centre and the RBI to review the move to charge interest on deferred EMIs during the moratorium period.

New Delhi: The Centre and RBI Tuesday told the Supreme Court that the moratorium period on repayment of loans amid the COVID-19 pandemic is extendable by two years.

Solicitor General Tushar Mehta, appearing for the Centre and the Reserve Bank of India (RBI), told a bench headed by Justice Ashok Bhushan that several steps have been taken for stressed sectors and the economy has contracted by 23 percent due to the pandemic.

The bench said that it would hear on Wednesday the pleas which have raised the issue of interest being charged on instalments which have been deferred under the central bank’s scheme during the moratorium period amid the COVID-19 lockdown.

The apex court had earlier asked the Centre and the RBI to review the move to charge interest on deferred EMIs during the moratorium period.

SC Asks Centre to Clarify Stand on Interest Waiver During Moratorium

The top court had earlier said there was “no merit in charging interest on interest” for deferred loan payment instalments during the moratorium period announced in wake of the COVID-19 pandemic.

New Delhi: The Supreme Court on Wednesday took note of the Centre’s alleged inaction and asked it to clarify its stand within a week on the waiver of interest on interest for deferred payments of instalments for loans during the moratorium period announced due to the coronavirus lockdown.

A bench headed by Justice Ashok Bhushan said the Centre had not made its stand clear on the issue despite the fact that ample powers were available with it under the Disaster Management Act and was “hiding behind the RBI”.

The apex court granted time to the government after Solicitor General Tushar Mehta sought a week’s time to file a response.

“My Lordships may not say that. We are working in coordination with RBI,” Mehta said.

The bench, also comprising Justices R. Subhash Reddy and Justice M.R. Shah, asked the solicitor general to clarify stand on the Disaster Management Act and whether additional interest on existing interest could be accrued.

Also read: ‘Moratorium Extension Will Determine Economic Recovery in India’

Mehta argued that there cannot be a common solution for all the problems.

Senior advocate Kapil Sibal, appearing for the petitioner, informed the bench that the loan moratorium’s deadline would end on August 31 and sought its extension.

“I am only saying that till these pleas are decided, the extension should not end,” Sibal said.

The apex court has now posted the matter for hearing on September 1.

The top court had earlier said there was “no merit in charging interest on interest” for deferred loan payment instalments during the moratorium period announced in wake of the COVID-19 pandemic.

The bench was hearing a plea filed by Agra resident Gajendra Sharma, who has sought a direction to declare the portion of the RBI’s March 27 notification “as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrower and creates hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution of India”.

Sharma has also sought a direction to the government and the Reserve Bank of India (RBI) to provide relief in repayment of loan by not charging interest during the moratorium period.

On June 4, the top court had sought the Finance Ministry’s reply on the waiver of interest on loans during the moratorium period after the RBI said it would not be prudent to go for a forced waiver of interest risking financial viability of the banks.

The top court had said there were two aspects under consideration in this matter – no interest payment on loans during the moratorium period and no interest to be charged on interest.

It said these were challenging times and it was a serious issue as on one hand, moratorium was granted and on the other, interest was charged on loans.