The loan moratorium scheme was announced by the Reserve Bank of India (RBI) as an emergency relief measure to stressed borrowers in the wake of coronavirus pandemic. Those borrowers who opted for loan moratorium has now become a burden for them. They have to pay interest-on-interest or compound interest that will increase their regular equated monthly instalments (EMIs).
The interest wavier matter is in the Supreme Court, as an ongoing case and outcome are eagerly awaited by borrowers, the central bank, and government. Several borrowers are expecting a complete waiver of the interest amount during a given loan moratorium period. If the full interest waiver is ruled out by the Supreme Court, borrowers will be charged compound interest and loan repayment burden will considerably rise steeply.
According to the Reserve Bank of India (RBI) estimate, if the full interest waiver happens then banks will have to bear a significant loss of around INR 2 lakh crore. As the matter is in the country’s highest court, even the government has constituted a special high committee to examine the issue of interest waiver, whether interest-on-interest is charged to borrowers or government should bear the burden of interest waiver.
Several financial and legal experts are expecting that the Supreme Court will not be ruled out full interest waiver instead pass the judgement as interest-on-interest will not be charged to borrowers as it amounts to a penalty. It’s a tricky decision because six months of the moratorium was implemented as an emergency response measure. It was specified by banks and they will only be deferring EMIs for six month moratorium period not waiving the loan or interest amounts.
Currently, the Indian economy in the doldrum state and even contracted in the last quarter. Amid significant pay cuts, mass layoffs, and limited cash flows to borrowers might affect loan repayment regardless of whatever the ruling of the Supreme Court. For example, a borrower paying an EMI of INR 45,000 on a INR 40 lakh home loan drawn at 10% for 15 years will have an EMI of INR 48,000 after moratorium period. On the other hand, if the interest waiver is allowed banks will have to absorb the entire amount. As we know the banks are already grappling with capital starvation, seating on the pile of non-performing assets (NPAs) and ultimately the government will suffer a significant amount due to interest wavier implementation.
Let’s wait and watch the ruling of the Supreme Court and government committee findings whether interest waiver is given or not.