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Interest waivers on loan moratoriums: Financial superspreaders?

“The banking laws are aimed at protecting depositors and nothing should be done to jeopardize their interest”. -Uday Kotak, CII President, Billionaire Banker


Covid-19 has now evolved from jumping from person to person, to infecting the corporate world. Over our previous articles, we’ve seen how it has impacted particular industries and companies, but now the backbone of the Indian economy i.e. financial markets might get infected, all of this dependent on the Supreme Court’s decision on the interest levied on loans which have opted into moratorium.


A little background into what's happening


RBI on March 27th had decided to give banks/financial institutions the power to give moratorium options to borrowers, for 3 months. On May-23, they announced 3 more months of the moratorium, effectively extending this to August-31.


In addition to this, they’ve allowed banks to convert the accumulated interest for these 6 months into a Funded Interest Term Loan (FITL) which can be paid by March-31,2021. And as per the latest RBI estimates, out of the ₹ 100 lakh-crores loans in the banking system, 39% have opted into the moratorium scheme. As per our epidemic analogy, RBI has given basic “PPE equipment” to banks(doctors) to protect themselves and the borrowers(infected patients).


What is the case in the Supreme Court about?


Now the Supreme Court has scheduled a hearing for a case tomorrow (June-12). Filed by a small businessman from Agra, he has asked the Supreme Court to force the RBI to waive interest from the period completely.


This would be akin to saying hospitals are having the luxury of PPE while people are dying outside without masks. While banks need to take care of the borrowers, they also have to keep their best interest, as well as the best interests of crores of depositors in mind. For many folks, especially the retired segment, the interest from their fixed deposits is how they take care of their day-to-day!


Who bears the burden?


The detachment and distance between the person paying the benefits and the person receiving them makes it challenging to understand who bears the burden. As the person on whom the burden falls becomes more distant, it becomes easier to sympathize with the other party, which certainly seems to be the way things are going in the current case.


As per RBI’s reply to the Supreme Court request, cancellation of interest on the moratorium will lead to a whopping loss of ₹ 2 lakh-crore. If the interest is waived off, the burden of the amount will either fall on banks, and through them will be passed on to the depositors - or will have to be borne by the state, and through it be borne by current or future taxpayers.


During all this, NBFCs which were facing liquidity issues pre-Corona, are going to speak on June-12 in the same case hearing. They want the banks to give them the moratorium by default, instead of leaving it to the bank’s discretion. This battle will be fought between SEBI & CREDAI (a real estate confederation).


Will the Supreme Court give in to the emotionally charged petition, and create a Superspreader event in the financial markets, or will saner minds prevail? We’ll have to wait and watch.


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About the Author: The post is written by our EZPP partner Jayaditya Sirasani with relevant edits and changes by our editorial team. Jayaditya is a graduate from IIM Calcutta, currently working with Accenture Strategy.


Disclaimer: All views expressed in the post are personal, and not related to any organization to which the writer belongs.

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