Loan moratorium: A last-ditch attempt is on to save India's banks from collapsing

An affidavit filed by the finance ministry comes across as a last ditch attempt to convince the court that borrowers will get a chance with concessions and loan rescheduling, and banks, no matter how big and bad, will fail to serve the interest of...

Never before has the Supreme Court put bankers on the edge. They anxiously await the outcome of a case where the apex court, which jurists describe as “supreme but not infallible”, will rule whether banks have to waive the entire interest amount on loans for six months till August 31, 2020.

During this period, several borrowers were allowed to defer the servicing of interest and repayment of loans under a moratorium announced by the Reserve Bank of India in the wake of a lockdown caused by the COVID-19 outbreak. The moratorium, however, was given on the condition that such borrowers would pay the loan interest later, along with the charge on account of the delay -- better known as `interest on interest’.

What flummoxed banks as well as the government -- which owns half the banks in the country -- is a petition before the Court that the interest on loan should be waived due to the hardships brought about by the pandemic.

Given the downturn in business and plight faced by several borrowers, many banks may have quietly reconciled to the idea of foregoing the `interest on interest’ -- a charge which, though perfectly valid in money lending and will be defended by any lender -- carries a usurious element that may be difficult to justify in the middle of a pandemic.

But a waiver of interest, which could easily cross Rs 1 lakh crore, is another story. Neither can any bank afford a waiver of interest for approximately a quarter of its borrowers for six months, nor is New Delhi ready to sign a cheque to recapitalise banks whose capital would be eroded by loss of earnings.

The impact of moratorium is not yet reflected in the books of banks. Under the mercantile system of accounting, banks continue to book interest income on loans which are under moratorium. With the RBI declared moratorium having ended on August 31 -- and assuming that the Supreme Court does not extend it --- banks would rejig the loans to give borrowers a second chance. The recast loans may have a lower interest rate, longer repayment period, and even an initial period of moratorium --- during which interest would not have to be paid immediately.

This is the kind moratorium that banks anyway give on restructured loan. For instance, if a homebuyer has three years left to repay the loan, the bank can stretch it for another year, and offer a moratorium of three months till November 2020; or, if a loan has to be repaid in a year, the borrower may get two more years and a moratorium of say five months. It would vary from loan to loan, borrower to borrower, bank to bank.

The government and banks are simply telling the court they are ready to handhold borrowers as they pick up the pieces. Indeed, an affidavit filed by a finance ministry official (on behalf of the government) may be aimed to reassure the Court that the measures taken by the government and RBI are adequate to soften the blow on individuals and businesses.

The affidavit come across as a last ditch attempt to convince the court that borrowers will get a chance with concessions and loan rescheduling, and banks, no matter how big and bad, will fail to serve the interest of hapless depositors in the absence of interest income from loans -- that balance has to be preserved.

Where the affidavit talks about RBI circulars permitting “lenders to allow moratorium of up to two years”, it reads like an online store offering discount of ‘up to 90%’. The new moratorium, if any, that comes after August 31st, could actually be much shorter (than two years) and would depend from case to case -- just as the case in any loan restructuring.

Whichever way the Court rules, it would set a precedent not only in banking but also in the rule book of disaster management.

Views expressed are author's own




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