Tightrope walk for Govt over loan moratorium
It appears that the Union Ministry of Finance ran into a brick wall. Just like its smooth arrival, the six-month loan moratorium was to exit making no more noise than a shadow. Instead, it became a hot button issue with the Supreme Court hearing a batch of petitions seeking an interest waiver. The government’s stand is thus crucial. It set up a three-member expert committee to assess the impact of a waiver of interest, interest on interest accrued during the moratorium period, on the Indian economy and financial stability.
One must admit that under the prevailing penniless conditions, it’s not an easy job to suggest foregoing precious interest income. According to the RBI, any forced interest waiver will hurt banks by as much as
Rs 2 lakh crore, or 1% of the GDP or 15% of the banking sector’s net worth. It means even a partial loan waiver will be costly to the exchequer.
The moratorium was meant to help both banks and borrowers. But right from the start, the ultimate beneficiary was banks, who used the window to delay classifying sub-standard accounts as NPAs and continued to charge interest. Now, with the one-time restructuring scheme, lenders (borrowers too) have further room to get the house in order.
Without a moratorium, NPAs would have shot up, on which banks cannot charge interest and instead would have to set aside money for provisioning, denting their profitability. The government can exercise powers under the Disaster Management Act to grant a waiver, but that will be shooting itself in the foot as eventually, the sovereign will be forced to pick up the bill.
Borrowers say interest on interest is ‘worse than taking a pound of flesh’, and the apex body rightly wants to balance business and consumer interests, but excluding interest levy goes against the principles of banking, particularly the gains of compounding interest, sets an incorrect precedent and dilutes credit culture. The onus thus falls on the government to come to the rescue of borrowers without hurting those who serviced loans against hardships and also ensuring that truant customers don’t get undue benefit.