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All You Need To Know About Interest Waiver Scheme for Moratorium Loans
Oct 29, 2020

"Common man's Diwali is now in the hands of the government".

These were the remarks of the honourable Supreme Court--sometime around mid-October 2020--after the government through Solicitor General, Tushar Mehta, submitted before the three-bench court (headed by Justice Ashok Bhushan and comprising Justices M.R. Shah and R. Subhash Reddy) that it (the Centre) would require a month to implement its decision on waiver of interest on interest on loans up to Rs 2 crore.

For those of you who unaware of the matter, here's how it started...

An Agra-based resident, one Mr Gajendra Sharma, filed a petition citing obstruction in 'Right to life' (guaranteed by Article 21 of the Constitution of India), caused by the Reserve Bank of India (RBI's) notification on interest charged on the loan amount during the moratorium period.

The Supreme Court, thereafter, called for government's response to the plea that challenged the interest on loans charged during the entire moratorium period i.e. between March 1, 2020, and August 31, 2020.

Subsequently, the RBI filed an affidavit stating that waiving the entire interest on loans charged during the moratorium period would be unviable since the amount payable could be Rs 2.01 lakh crore -equal to 1% of India's GDP.

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Following this, the Supreme Court observed two facets of the issue: one, the interest payment on loans and two, the interest on interest charged by financial institutions during the moratorium period (between March 1, 2020, and August 31, 2020). The Supreme Court slammed the government for "hiding behind RBI" and for not clarifying its stance on the subject matter in the given time.

The Apex Court had also reminded the government that the problem was caused by COVID-19 lockdowns and it wasn't a time to look only at business, but rather to consider the plight of the people.

On October 2, 2020, the government communicated its decision to the Supreme Court thereby agreeing to offer interest waiver on loan moratorium to the borrowers on the compounding interest component charged during the moratorium period. But Solicitor General, Mr Tushar Mehta articulated that the process (to fix the modalities) will take time (the outer limit being November 15, 2020) as each loan account was different and the terms and conditions are diverse and complex. To this, Justice Bhushan said, "You need one month to complete the modalities? We don't agree with this. Implementing such a small decision takes a month? You are delaying it. This is not in the interest of the common man. When you have taken a decision it doesn't require a month. That's not fair on the part of the government even though we have given enough time."

Justice MR Shah expressed a similar viewpoint: "Consider the plight of the common man. It is a welcome step to help the small man. They need some concrete help. We want some action." And on a lighter note, he remarked, "Their (the common man's) Diwali is in your (the government's) hands."

At present, somewhat unwillingly though, in less than a month the government has doled out a Diwali bonanza for borrowers. Recently, the finance ministry issued guidelines for the implementation of interest on interest waiver scheme, which is expected to provide relief to thousands of borrowers.

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Who will get the benefit?

Borrowers having sanctioned loan limits and outstanding loan amount upto Rs 2 crore on an aggregate basis as on February 29, 2020, will get the benefit of government's interest waiver scheme. Thousands of borrowers can breathe a sigh of relief.

More importantly, the scheme does not make any discrimination between borrowers who had opted for the moratorium and those who did not. In other words, it is a blanket waiver on the interest on interest charged during the loan moratorium period. The rate of interest would be reckoned as per the loan agreement, the notification says, and any change in the rate after February 29, 2020, will not be reckoned for the scheme.

The scheme will cover a variety of loan categories including MSME loans, home loans, credit card dues, vehicle loans, education loans, and consumer loans.

Loans availed from banks including co-operative banks and NBFCs will be eligible for the benefit under the waiver scheme, subject to the fulfilment of certain conditions such as the threshold of the loan and its type, among others.

To avail the scheme, a condition is that the loan account should be classified as 'standard' (i.e. it should not be Non-Performing) as on February 29, 2020.

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How the interest waiver scheme will function?

By November 05, 2020, banks/financial institutions will have to credit the borrowers' accounts with the amount they had charged earlier towards the interest on interest. The lenders will have to submit their reimbursement claims to the government by December 15, 2020. This scheme -a relief package - will cost the government Rs 6,500 crore.

Not everybody's happy though...

Many have questioned the government's move of applying a flat threshold of Rs 2 crore on the loan amount. Their primary argument is: If the relief package is for the vulnerable borrowers affected by the pandemic, it should exclude borrowers having a strong financial background. For instance, a small business enterprise who has opted for a loan of up to Rs 2 crore could be called vulnerable and thus allowing it a relief may be justified. But how can an individual who has opted for a home loan of Rs 2 crore (and has adequate financial resources to repay) be deemed vulnerable or weak?

What's the way forward?

On November 2, 2020, the Supreme Court will again hear the matter of loan waiver on the entire interest component for the period under moratorium. Supreme Court's observations in this regard will be crucial.

The government has time and again expressed its discomfort with allowing the waiver on the entire interest component.

Solicitor General, Mr Tushar Mehta has already hinted at the possible consequences of any such waiver. "There are Rs 133 trillion in deposits with banks and interest has to be paid on them and the waiver will have a cascading effect", he articulated before the bench hearing the plea.

One more critical issue has been the classification of NPA. In September 2020, the Supreme Court had ordered that the loan accounts which were standard assets on the books of the banks on August 31, 2020, shall remain out of the purview of NPA classification till further orders.

In response, the RBI filed an affidavit to highlight the potential consequences of the court-ordered ban on the classification of assets. It is humbly submitted that this court had given an across the board stay on the classification of any account as NPA till further orders. If the stay is not lifted immediately, it shall have huge implications for the banking system, apart from undermining the regulatory mandate of the RBI, cautioned the central bank.

NPAs, economic growth and credit behaviour of borrowers are all interlinked.

The statement of Dr Michael Debabrata Patra in the Minutes of the Monetary Policy Committee Meeting-October 7 to 9, 2020, released on October 23, 2020, foretell how bad the problem of NPAs could turn if the economic growth fails to revive.

With reference to NSO's provisional GDP estimates for Q2, Dr Patra noted that if the projections hold, the level of GDP would have fallen approximately 6 per cent below its pre-COVID level by the end of 2020-21 and it may take years to regain this lost output. And longer the time India's GDP takes to recover; direr would be the problem of NPAs.

On this backdrop, the Supreme Court's upcoming directives on the plea of interest waiver would assume utmost importance, not only for borrowers but for the entire financial system.

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Author: Rounaq Neroy

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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