The Indian Banks’ Association (
IBA) has sent a communication to the
Finance Ministry to pay the compound interest charged to borrowers with loans above Rs 2 crore during the moratorium period of March 1 to August 31, 2020.
Though most private banks have provided for the compound interest waiver, bankers are of the view such a move will set a precedent and want the government to foot the bill. They are expecting a reversal benefit on the interest on interest payment, according to a report.
The Supreme Court order
The Supreme Court in its order last month had directed the government and the RBI to waive penal interest charges on all loans, while rejecting the demand of borrowers to extend the repayment moratorium beyond August 31 and for a complete interest waiver. The loan moratorium scheme was aimed at giving temporary relief to borrowers.
In November last, the government decided to waive interest-on-interest for borrowers below loan exposure of Rs 2 crore. It paid nearly Rs 6,000 crore to lenders to compensate them for the income loss.
Bank provisions
After waiting for the government to burden the compound interest on loan waivers, top banks have provided for payment in the fourth-quarter results.
HDFC Bank has provided Rs 500 crore for interest on interest while ICICI Bank said it has kept Rs 175 crore aside for it, according to the Q4 results announced by these banks. Axis Bank has provided Rs 160 crore while Mahindra Finance has made a provision of Rs 32 crore.
How much does it cost?
Waiving compound interest on loans above Rs 2 crore could cost nearly Rs 4,000 crore to public sector banks, Rs 2,500 crore to private banks and another Rs 1,000 crore to non-bank lenders.
While ICICI Securities had put the total compound interest burden on loans above Rs 2 crore at Rs 11,700 crore, other analysts have put it between Rs 7,000 crore and Rs 10,000 crore. As per rating firm ICRA, compound interest for six months of moratorium across all lenders is estimated at Rs 13,500-14,000 crore.
The Indian Bank Association has recently finalised a methodology for the calculation of the interest on interest component.
Under the norms, borrower accounts which were standard as on February 29, 2020, including SMA0, SMA1 and SMA2 will be eligible for the refund. All loans, working capital, trade products, outstanding during the moratorium period shall be considered for the compound interest waiver.
The government stand
The government had reimbursed banks for forgoing compound interest, or interest on interest, on loans up to Rs 2 crore outstanding during March-August last year, when borrowers had the option to seek a moratorium on repayments.
Lenders have been charging compound interest on larger amounts, but the Supreme Court order means they must now refund it to borrowers. Banks were hoping that the government will take on the burden by enhancing the scope of the ex-gratia scheme to cover the additional refund after the apex court order.
