INTEREST WAIVER TO COST GOVT RS 7500 CRORE: CRISIL

INTEREST WAIVER TO COST GOVT RS 7500 CRORE: CRISIL
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INTEREST WAIVER TO COST GOVT RS 7500 CRORE: CRISIL

By Bikash C Paul 

As the Narendra Modi government decides to share some burden of the consumer by providing ex-gratia payment of interest-on-interest by banks and NBFCs, it is estimated to cost the exchequer Rs 7500 crore. Rating agency Crisil has come out with this initial calculation based on guidelines announced by the Finance Ministry on Friday. 

The Covid-2019 crisis had forced the government to initiate moratorium on loans for six months—March to August. That essentially meant borrowers might opt for not to pay their EMIs for the six-month period. A non-payment will not be classified as Non Performing Asset or default. However, a borrower has to bear additional interest if he or she avails the moratorium. 

Modi government has been under pressure to instruct the banks to ‘waive’ the ‘interest on interest’ for EMIs. Even the Supreme Court too favoured a complete interest waiver. However, the government and the banks strongly opposed a complete waiver of interest. 

The government prefers to pitch in. It has agreed to share a part of the burden which would ease pressure on both consumers and banks. “With the government expected to bear the cost of waiver on small-borrower loans, the potential burden on lenders, already facing profitability pressure and asset-quality challenges because of the Covid-19 pandemic and challenging macroeconomic environment, has eased,” says Crisil. 

 

The benefit will be extended to borrowers with outstanding loans of less than Rs 2 crore, irrespective of whether the moratorium was availed of or not. Such loans account for more than 40% of credit and 75% of borrowers.

Says Malvika Bhotika, Associate Director, CRISIL Ratings, “Extending the benefit to all eligible borrowers irrespective of whether they have availed of moratorium or not, will assuage concerns over unfair treatment that borrowers not availing of moratorium could have otherwise harboured.”

Also, to ensure effective and timely implementation, the government has asked lenders to credit the amount to eligible borrowers latest by November 05, 2020. This will be the difference between compound interest and simple interest over six months (March-August). While lenders have to apply for reimbursement by December 15, 2020, the timelines for receipt of funds from the government are yet to be notified.

Says Krishnan Sitaraman, Senior Director at Crisil, “Our analysis shows a complete interest waiver (including interest on interest) for eligible loans up to Rs 2 crore would have meant a staggering Rs 1.5 lakh crore impact. This could have posed significant challenges for the government as well as the financial sector. Waiver of only interest-on-interest will have a much milder and manageable impact.”

From a borrower’s perspective, the benefit would be relatively higher for those who had availed of higher-yielding loans. Consequently, borrowers of unsecured, micro and gold loans will benefit more than those who had taken home loans.

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