The Covid-19 crisis has turned life upside down for most families and businesses. With the Centre for Monitoring Indian Economy saying that over 21 million salaried lost their jobs since April, the finances of many families are in complete disarray. Against this grim backdrop, comes the demand for interest on loans accrued under the Covid-19 moratorium to be waived.
On March 27, the Reserve Bank of India (RBI) said that banks would be allowed to grant a moratorium on the payment of loan instalments due between March 1 and May 31. It was later extended till instalment due until Aug. 31. Under fire from the supreme court after a businessman moved court also seeking a waiver of interest for loans under moratorium, the Centre said it has set up a committee to measure the economic impact of such a move. On Monday, the court gave the government until Oct. 5 to present a plan on helping borrowers.
The question: is waiving interest the right solution?
If one goes by the statement of RBI governor Shaktikanta Das, it isn’t. “The primary concern of the banking system is the protection of depositors’ money,” Das said at an event organised by the Federation of Indian Chambers of Commerce and Industry. “Ultimately, it is the depositors’ money that is being lent out.”
In ideal circumstances, such a question—waiving interest (or interest on interest) on loans under moratorium—should have been a no-brainer. How can banks even think of waiving interest on moratorium? After all, they are using the depositor’s money to lend (and earning a few percentage points over deposit rates). Since depositors have to be serviced, banks can ill-afford to give any leeway to borrowers.
However, there is more to this argument—one of credit culture. Yes, job losses and salary cuts have been rampant, crippling repayment ability and purchasing power. But most are paying their instalments by cutting expenditure, digging into their reserves, selling investments or even borrowing from the Employees’ Provident Fund. No wonder the number of moratorium seekers has come down in the recent months.
The proportion of banks’ books under moratorium has already halved in the recent quarter—from around 25% to 10%-15%, according to various estimates. Won’t a waiver so late in the day be unfair on those who have chosen to maintain their credit culture despite hardships?
Deepak Parekh, chairman of the Housing Development Finance Corporation and some other bankers have made another point: many have used the moratorium window as a liquidity-management exercise. And they should know.
The facts are simple here. People who have the money will pay, and ones who are genuinely unable to do so will seek restructuring—an option that the RBI has already provided. And banks have the ability to sift between the wheat and chaff. If some are completely unable to pay, even a restructured home/car/personal loan, it will become a non-performing asset (NPA) and dealt with under the Sarfaesi Act. In the case of personal loans, the process might be more complicated.
But in short, the laws of dealing with default are well-laid out. If a precedent is set, it can be misused in the future. There is another danger. Banks’ books. The rush to raise capital clearly indicates that they are anticipating the worst, in terms of NPAs, once the moratorium is over.
The best-case scenario: the government can step in to bear some of the banks’ burden by introducing an interest subvention scheme (where the government bears some of the interest cost on loans). It could be a sort of Pradhan Mantri Awas Yojana for weak borrowers, or like some lenders reportedly have suggested to the committee, the government could bear the entire interest cost estimated at around Rs10,000 crore ($1.33 billion). Yes, it is unfair on diligent borrowers, but it’s the only way out to help the genuinely distressed.
However, the government’s finances aren’t in great shape either. It has already declared Covid-19 an “act of god.” States, in need of money desperately, will be at the mercy of the bond markets. Even the salaried have been encouraged to withdraw from their Employees’ Provident Fund to survive rather than being given some tax relief.
There is a fundamental principle in finance—don’t throw good money after bad money. Waiving interest on loans under Covid-19 moratorium or interest on interest is not a viable option for banks. What’s more, it could put further downward pressure on deposit rates. Who wants to earn less on their deposits?