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What We Know in the RBI Loan Moratorium Issue So Far

Editor, TRANSFIN
Oct 9, 2020 3:52 PM 5 min read
Editorial

"To pay or not to pay?"

The Government's attempt of hand-holding “vulnerable” borrowers to tide over the COVID-induced economic downturn is not as straightforward (or Shakespearean for that matter)...

The undeniable truth is that “waiving off” anything comes with its own costs. Interest payments on loans are no different and calibrating them any which way will have meaningful ramifications. As things stand, while the matter of dealing with interest payments appears to be largely in control, waiving of “interest on interest” is far from reaching its optimum conclusion. In fairness, it is a much more complex endeavour. 

In the latest episode of this see-saw between the Centre and the RBI, the Supreme Court says that the Centre’s affidavit on waiving off "interest on interest on loans" of up to ₹2cr ($272,437) fails to deal with several issues and has asked the RBI and the Centre to file an additional affidavit within a week. The matter will be heard next on October 13th.

A Timeline of Events

Let's begin from the beginning. Here's what has been happening so far:

March 27th 2020

RBI said all individual borrowers who had outstanding term loans on March 1st 2020 were eligible to opt for a three-month loan moratorium on EMI payments for next three months (March 1st - May 31st).

April 30th 2020

Supreme Court instructed RBI to ensure the above guidelines are followed by all banks in "letter and spirit".

May 22nd 2020

This moratorium further extended till August 31st.

June 17th 2020

Centre tells SC waiver of interest is not possible.

August 7th 2020

RBI says no to further extension of moratorium. Unveils debt resolution plan for borrowers.

September 1st 2020

Centre tells SC loan moratorium period can be extended by two years.

September 18th 2020

Three-member expert Committee chaired by ex-CAG Rajiv Mehrishi set up by the Centre to assess the impact of a possible loan waiver.

October 3rd 2020

Centre agrees to waive "interest on interest" on loans up to ₹2cr ($272,437).

October 13th 2020

Supreme Court to hold the next hearing on the matter.

As is evident, the pandemic set in course a very interesting chain of events where the RBI as well as the Central Government are going back and forth on their directives.

 

Basic Terminology?

Here’s a quick recap on the key terms being thrown around. 

Moratorium: This means a temporary stop. So when the RBI says three-month moratorium, it means you are legally absolved from paying your EMIs (principal+interest) for the next three months.

Term loans: This includes retail loans (home, personal, education etc.) and corporate loans. Extended to credit card dues as well even though they don't count as term loans.

Waiver: A complete pardon. 

If you defer your EMI payments for a while, you don't have to spend on them for a while but the interest on those loans will keep mounting. And not just that, but the "interest on interest" (compound interest) too. Which is particularly unsavory for borrowers because that will alter the entire structure of future payments (inevitably increasing the amount too). 

In that context, keeping true to the Mehrishi Committee's recommendations, the Centre decided to waive that portion for selected loans to the extent of ₹2cr ($272,437), bringing partial relief to borrowers. The Government also seems rather clear that individuals or entities whose loan amount is greater than that ₹2cr threshold will not be eligible for the waiver of the compound interest. The Government argues that banks can be hit with an estimated ₹6Lcr ($81.73bn) headwind if it agrees for a waiver on all loans, eroding the bank's net worth quite meaningfully.

While this makes sense, clubbing all borrowings sub-₹2cr as “vulnerable” irrespective of the nature of the borrowing appears to be over simplistic. For example, home loans, education loans, business loans and credit card debt of an equivalent amount, most certainly carry different “vulnerability” and risk profiles.

 

Questions Still Unanswered

"Hiding behind the RBI" is a neglected phrase. Use it today, just like the Supreme Court did to describe the Centre. 

While the phrase might be partly appropriate, the truth is that such a complex exercise is bound to exhibit several dangling threads. And at every step, the sanctity of lender-borrower mechanics ought to be somewhat preserved. 

To begin with, as per the notification, is the moratorium mandatory to apply for all banks? And for NBFCs? Considering that some banks aren't implementing it and among the ones who are, customers who opted for it are still receiving monthly notices from their banks.

Second, what's the standard for computing final interest rates? Now that compound interest is waived off, do the previous norms apply? There's no clarity because the Centre's announcement on the waiver hasn't been enforced yet. 

Third, what happens to borrowers who did not opt for the moratorium? A recent report suggests the Government might consider reducing the notional amount of interest on interest from their outstanding principal amounts. There has to be some reward for the model citizens paying off debts even during the lockdown, eh?

Fourth, what exactly do you mean by "moratorium can be extended by up to two years"? The most plausible explanation for this suggests that if a borrower is afraid of defaulting on loans and turning into an NPA soon, he/she could choose to avail moratorium as part of a debt-resolution plan, which is yet to see the light of day.

 

A Complete U-turn

If you are a banker in the country right now, these developments just keep going downhill for you. Days when the Centre defended your pockets by denying any plans to waive loans because they "go against the basic canons of finance" are gone.

Waiving of the compound interest, as the Centre did, can only mean added burden to your treasuries, along with unnecessary work and added litigation which could further derail the economy. 

Even though the Government says it is going to foot the bill, if history has taught us anything, the proceeds from those bills will take a long time to be obtained by the banks. 

Their suggestion, therefore, is to restructure the loans rather than waive the interest component.

The Kamath Committee recommendations are indeed opportune in their contribution in this regard here because their recommendations on graded restructuring of stressed accounts is exactly the kind of tonic the Government needs to offer the banks at the moment. 

Even though the Committee's recommendations only apply to loans above ₹1,500cr ($204m), once the bottom of the barrel is cleared, the vents can take care of themselves. 

All that remains to be seen is how the Supreme Court assuages this conflict and determines the course for post-pandemic debt obligations.

FIN.

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