Money & Banking

Banks want FinMin to pick up the tab if interest is waived on loan moratorium

K Ram Kumar Mumbai | Updated on September 30, 2020

B anks’ average term deposit rate of over one year tenor declined to 4.90-5.50% as on September 18, says RBI report   -  Bloomberg

In case the Ministry does not acquiesce to this request, banks will be forced to cut interest rates on deposits further

Banks have made a submission to the Finance Ministry to the effect that if they are required to waive interest on the deferred interest in the case of borrowers who opted for the Covid-related loan moratorium, the Ministry should make good the amount waived.

The Supreme Court is hearing a batch of petitions by individuals and industry bodies, seeking relief on loan repayments and waiver of interest in view of the adverse impact of the pandemic. The next date of hearing is October 5.

Bankers reason that since banks pay interest on interest on deposits or liabilities (compounding effect), they cannot afford to forego interest on the deferred interest on the assets (loans) side of the balance sheet.

In case the Ministry does not acquiesce to this request of banks, they will be forced to cut interest rates on deposits further. Depositors are already reeling under the impact of the current low-interest rate regime. According to latest Reserve Bank of India (RBI) data, banks’ average term deposit rate of more than one year tenor declined to 4.90-5.50 per cent as on September 18, 2020 vis-a-vis 5.90-6.40 per cent (as on March 20, 2020), prior to the nation-wide lockdown.

A senior public sector bank executive underscored that since the loan moratorium was brought in at the government/RBI’s behest, it is necessary that they be compensated if the interest on the deferred interest on loans during the six month moratorium period (March 1, 2020 to August 31, 2020) is waived.

Margin, profit ‘face hit’

If banks absorb the cost of interest on the deferred interest during the moratorium period but do not cut the deposit rate, it will hit their margin and profitability.

The RBI’s latest annual report has cautioned that the regulatory dispensations the pandemic has necessitated in terms of the moratorium on loan instalments, deferment of interest payments and restructuring could have implications for the financial health of banks unless they are closely monitored and judiciously used.

Relief for borrowers

According to Crisil Ratings, three out of four entities that availed themselves of moratorium are rated in the sub-investment grade.

“Most of them were grappling with a slowing economy even before the pandemic began. The severely curtailed business activity that followed in the first quarter of this fiscal cramped cash flows, so the moratorium came as a big relief,” it said in a note.

The credit rating agency observed that only one out of four companies that availed itelf of the moratorium is rated in the investment grade. They took recourse to the moratorium to build a liquidity cushion for exigencies in the near term.

Crisil assessed that every fifth company in highly impacted sectors such as gems and jewellery, hotel, auto components, automobile dealers, power (power utilities, independent power producers and energy traders), packaging, and capital goods and components availed of the moratorium.

On the other hand, only one in ten did from less-impacted sectors such as pharmaceuticals, chemicals, FMCG (fast moving consumer goods), secondary steel and agriculture.

Published on September 30, 2020

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