In what has been called the Government's Diwali gift for millions of borrowers in the time of COVID-19, an interest waiver was announced for loans up to Rs 2 crore, this time, regardless of whether the moratorium was availed or not. The relief will come in form of an ex-gratia payment of the difference between compound interest and simple interest for the period from March 1 to August 30.
For eligibility, the borrower cannot have outstanding loans that exceed Rs 2 crore. Furthermore, the accounts in question must be standard as on February 29 i.e., should not be a non-performing asset. Under these criteria, housing loans, education loans, credit card dues, auto loans, MSME loans, consumer durable loans and consumption loans are all covered by this waiver.
The scheme will route its benefits through the lending institutions themselves which will be compensated by the Centre for ex-gratia payments to be made to eligible borrowers. The lending institutions may claim these reimbursements latest by December 15 of this yeat but only after crediting amounts to the borrowers. A claim that is made must first be pre-audited by the statutory auditor of the lending institution.
All in all, this waiver will cost the Government somewhere in the region of Rs 6,500 crore. To recap, this waiver came about as a solution to an older problem. When RBI had initially announced a moratorium on repayments over the aforementioned six months to cushion the impact of the pandemic, lending institutions had continued to nevertheless accrue compound interest over this period. This created situations where interest was piled up on interest, creating an even heavier burden on the borrower post-moratorium. After being taken up to the SC, the matter ultimately culminated in the Government scheme to waiver interest.
The pressure to ensure that the scheme works as intended is already on. In one of its remarks, the SC stated to the lawyers representing the banks and the Centre that, "Diwali is in your hand." On the face of it, this scheme should clear away lingering uncertainties over bank earnings for the quarter. With the Government footing the bill, there should be little concerns over the impact to profitability. This should, in theory, allow banks to approach loans-restructuring for COVID-hit borrowers in a more liberal fashion, having a cascading effect. However, not everyone is convinced by such projections. Concerns have been expressed regarding the scheme. Many banks have expressed apprehension of the long, laborious process of getting money back from the Government. As has been noted, in the case of similar schemes for farm loans, banks typically have to wait nine to 24 months to get the funds. Indian lenders already strained by significant bad loans will be pushed into a situation of further pressure through this scheme, some have claimed. Other concerns exist as well such as that of the work required to recalculate millions or loans or the increasing legal costs of these lending institutions as lawsuits pile up. Some in the industry have even questioned the sort of trend this scheme encourages. They fear that in the event of the next emergency, even those who can afford to pay back may not do so simply because they think that the Government may step in to rescue them. The problem here is that other, less absolute options were not adequately considered.
Furthermore, concerns have also been raised over how this waiver equalises different type of borrowers as 'vulnerable' solely based on the amount of the loan. No two borrowers are the same and a borrower with a Rs 2 crore loan for a small business is likely to have a very different financial health as compared to a borrower with a Rs 2 crore home loan. In this case, it is hard to classify the latter as vulnerable. Finally, the ultimate cost of this waiver will be borne by the nation itself, in one way or another. The ultimate effect of this scheme will trickle down to the taxpayer. Still, these are early days for any conclusions to be made, good or bad.