Tag: moratorium period

The Reserve Bank of India (RBI) has asked all lenders to compensate borrowers with interest on interest charged between March 1, 2020, and August 31, 2020.

This will apply to all borrowers irrespective of whether the moratorium had been fully or partially availed, or not availed.

An RBI notification said that all lending institutions must immediately put in place a board-approved policy to refund or adjust the ‘interest on interest’ charged to the borrowers during the moratorium period as per the Supreme Court judgement.

In order to ensure that the above judgement is implemented uniformly in letter and spirit by all lending institutions, methodology for calculation of the amount to be refunded or adjusted for different facilities shall be finalised by the Indian Banks Association (IBA) in consultation with other industry participants and bodies, which shall be adopted by all lending institutions.The Reserve Bank of India (RBI)

“Borrowers who availed working capital facilities during the moratorium, whether they availed moratorium or not, should also receive refunds or adjustment. Lenders must disclose the aggregate amount of interest-on-interest refunded or adjusted by them in their financial statements for FY21,” the notification said.Earlier, the Indian Banks Association (IBA) had asked banks to refund interest on interest to those who have been charged.

Asset classification

The central bank also clarified that asset classification of borrower accounts by all lending institutions following the judgment by the Supreme Court should continue to be governed by the extant instructions: For borrowers who did not avail the moratorium, banks must follow extant income recognition and asset classification norms, for accounts which availed moratorium, lenders must remove the period between 1st March to 31 August 2020 for asset classification and for the period commencing 1 September 2020, lenders must follow asset classification as per extant norms.

The SC order

Last month, the Supreme Court had barred banks from charging penal interest on any borrower during the loan moratorium period.

“There should be no interest on interest or penal interest on the instalments which were due during the loan moratorium period from 1st March to 31 August 2020 on any borrower, irrespective of the loan amount. If such interest has already been collected, it should either refunded to the borrower or adjusted towards the next instalments,” the order had said

The calculations

As per rating firm ICRA, compound interest for six months of moratorium across all lenders is estimated at Rs 13,500-14,000 crore.

With the SC order, borrowers excluded earlier may get additional relief of Rs 7,000-7,500 crore in the form of compound interest benefit.
Even before the SC order, the government had said that it would compensate lenders for refunding interest on interest on small loans below Rs 2 crore, which has already been done.

Who will pick the tab?

It is not clear who will bear the additional burden of refunding compound interest or penal interest to borrowers with loans above Rs 2 crore, though the banks have been asked to refund it.

The banks, accounting for 70 per cent of the loan market, have operating profits of over Rs 3 lakh crore.

So, Rs 7,000 crore on Rs 3 lakh crore will be like 2 per cent of their operating profits, according to the rating firm.

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