Lenders want compensation for interest loss

Mumbai: The Indian Banks’ Association (IBA) has requested the government to compensate lenders for their income loss because of last week’s Supreme Court order, which prevented them from levying compound interest on loans for the moratorium period, two people with knowledge of the matter said.The request was made in a letter sent to the finance ministry on Saturday, they said.The government has already 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 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. Analysts estimate this amount to be between Rs 7,000 crore and Rs 10,000 crore“Banks are 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,” a banker in the know said. “While the larger banks could easily foot the bill, all lenders have decided that such a request should be made to the government to get clarity on the matter.”The Supreme Court in its order last week 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.Govt Not Inclined for Additional BurdenWaiving 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, say analysts. ET, citing a top official, reported on Monday that the government was not inclined to bear the additional burden. While a final call is yet to be taken, the government could ask banks to stagger the relief to borrowers over a few months, rather than taking another fiscal burden, the report said.Banks held a meeting on Friday last week where it was decided that they would work out a common approach to implement the directions of the Supreme Court. Lenders decided that the six-month moratorium period would be excluded while considering the non-performing status of accounts, irrespective of whether a borrower opted for moratorium or not. Banks also decided that they would start refunding compound interest they had already charged to borrowers within a “reasonable” time frame.The apex court had mandated that any compound interest deducted should be refunded to borrowers or they be given a credit adjustment in the next instalment of the loan account.“The IBA initiative gives operational clarity in NPA recognition, which will help both banks and the borrowers and facilitate smooth implementation of the recent Supreme Court verdict,” said Hari Hara Mishra, an independent banking expert. “Bankers’ request to the government for help in footing additional interest burden is logical, as banks, for the moratorium period also, will continue to have liability to pay depositors on compounding basis.”Meanwhile, NBFC industry body Finance Industry Development Council could also approach the government, as they want the state to compensate them for the cost towards paying interest to depositors. A representation could be made after the industry body assesses the impact of these waivers on individual members, people in the know said. 81751013

from Economic Times https://ift.tt/3u8TkBY