Banks want the government to pick up the tab for refunding amounts already recovered from borrowers, including those with loans above ₹2 crore, as interest on interest/ compound interest/ penal interest for the six-monthpandemic-related moratorium period.
Supreme Court judgment
This comes in the wake of the Supreme Court’s March 23judgment in the Small Scale Industrial Manufactures Association versus Union of India and others case.
Bankers fear that if they have to foot the bill for the aforementioned refund, their bottomline will be impacted.
Hence, banks, under the aegis of the Indian Banks’ Association (IBA), are planning to request the finance ministry to enhance the scope of its October 2020 ‘Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (March 1, 2020, to August 31, 2020)’ to cover even loans above ₹2 crore.
What this means is that banks want the government to shoulder the burden of the refund, estimated at about ₹7,000 crore to ₹7,500 crore.
As per the SC judgment: “There shall not be any charge of interest on interest/ compound interest/ penal interest for the period during the moratorium and any amount already recovered under the same head, namely interest on interest/ penal interest/ compound interest shall be refunded to the concerned borrowers and to be given credit/ adjusted in the next instalment of the loan account.”
Anil Gupta, Vice-President – Financial Sector Ratings, ICRA, noted that the government had already announced relief for borrowers having borrowings up to ₹2 crore, which was estimated to cost about ₹6,500 crore to the exchequer.
With announcement of waiver for all borrowers, he assessed that the additional relief of about ₹7,000-7,500 crore will need to be provided to borrowers.
Ex-gratia payment under the October 2020 Scheme covered borrowers having sanctioned limits and outstanding amount of up to ₹2 crore (aggregate of all facilities with lending institutions) as on February 29, 2020. The main condition to receive this payment was that the loan account should have been standard as on this date.
Categories of loans covered
Eight categories of loans – micro, small and medium enterprise, education, housing, consumer durables, credit card dues, automobile, personal loans to professionals and consumption loans – were covered by the scheme.
Policy analyst Hari Hara Mishra observed that the additional interest burden on banks for extending (refund of interest on interest/ compound interest/ penal interest) coverage to all eligible loans during the moratarium period should be dealt with as a relief measure during disaster management.
He emphasised that this burden should be borne by the government, as banks will have continued compounded liability to service the interest to depositors during the corresponding period.
Banking expert V Viswanathan cautioned that: “If banks pick up the tab, it will be cited as a precedent, which can be invoked later on by any borrower.
“That is why the ex-gratia scheme was implemented (for loans up to ₹2 crore) by the government so that this will not be quoted as a precedent against banks.”
He felt that if the government does not extend the ex-gratia payment to loans above ₹2 crore, private banks may file a review petition in the SC.
Meanwhile, the Indian Banks’ Association has advised banks that the moratorium period (March 1, 2020, to August 31, 2020) should be excluded for reckoning the number of days for deciding the non-performing asset (NPA) status under prudential norms. This is regardless of whether moratorium was requested for or not by the borrower.
Referring to the aforementioned advisory, Viswanathan said: “Suppose you have not exercised moratorium on February 29, 2020, and paid six installments during the moratorium period.
“Subsequently, if your ability to service the loan has been undermined, banks can consider these six installments as advanced installments from September 2020 till February 2021, thereby avoiding classification as NPA.” Moreover, borrowers credit rating will remain intact.
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