A heavy toll on banks

With the moratorium on loan repayments coming to an end on August 31, 2020, the issue of charging of a compound interest on interest accrued during the moratorium period has assumed importance.

The RBI has told the Supreme Court that contrary to its view that there was “no merit in charging interest on interest” for deferred loan payments, the reality was an estimated ₹2,01,000 crore or the equivalent of 1 per cent of the nation’s GDP would have to be foregone by banks if they were not to practice this seemingly Shylock-like usury.

The apex court nevertheless was not mollified and on August 26 observed that “this is not the time to think about the business of banks only. The government must consider the sufferings of borrowers also.”

The apex court also stated that there were ample powers under the Disaster Management Act that permit the Centre to act on the issue and come to a decision.

Govt’s plight

Nobody can make light of the plight of the borrowers but one must also look at the plight of the government which owns more than 75 per cent of the banks in the country and by extension shoulders the responsibility for collection of interest and principal amounts of the loans sanctioned. It must be remembered that many of our public sector banks (PSBs) would have been liquidated long ago but for the periodic infusion of capital by the Central government in the name of recapitalisation which is a euphemism for taking bad debts in its ample strides.

It is just not possible to grant moratorium during the difficult period and, at the same time, stop the interest clock from ticking as borrowers want. Their plight has moved their Lordships but they may be pleased to consider the other side also — government finances would go haywire if borrowers across the board were continued to be indulged.

The Insolvency and Bankruptcy Code (IBC) was just about beginning to show results in disciplining the defaulters when Covid struck necessitating suspension of the invocation of the IBC bankruptcy proceedings by a full one year. Already, there are fears that Covid and the lockdown are going to worsen the NPA position of banks.

The liberal ₹3-lakh crore window for MSMEs, it is feared, would result in the Central government bearing the cross in its capacity as the guarantor of such loans.

The Disaster Management Act might give a lot of powers to the Centre, including waiver of interest, but the government cannot go overboard and grant a please-all-borrowers waiver across the board. Yes, time can be given in deserving cases necessitating extension of the repayment period and increase in the number of EMIs. But every accommodation must come at a price. The price is interest, the only measure of compensation known to a bank for the sacrifice made by it.

It is wrong to entertain and encourage the notion that all borrowers are pitiable and, therefore, all lenders are merciless usuries and that all landlords are moneybags and all tenants are pitiable homeless and that all employers are exploiters.

The indiscriminate indulgence of borrowers by SICA that was replaced by IBC was responsible for borrowers thumbing their noses at the banks. Welfare state does not mean free lunch all along the way.

The writer is a Chennai-based chartered accountant