Waiving interest on interest

Waiving Interest on Interest during Moratorium
A person has filed a case in Supreme Court that the interest on the interest accrued and applied during the moratorium period 01.03.2020 to 31.08.2020 should be waived by banks, both for term loans and cash credit/overdraft accounts. While banks have every right to apply interest on the interest portion that has already been applied till it is paid off, the burden of interest on interest can be reduced in several ways. On 4th April 2020, I sent my suggestion to RBI as under: 

(Quote)
"RBI decision advising banks 

 (i) to extend a moratorium of three months on the equated monthly instalments or the normal monthly instalments in respect of all term loans outstanding as on 1st March 2020 and (ii) to defer the interest due on working capital facilities outstanding as on 1st March 2020


 will definitely help every borrower to breathe easy and help him/her/the organisation to make use of this money in meeting other pressing commitments. But the worrying factor is that the moratorium comes with a cost (i.e.) interest will be loaded on the deferred amount till it is paid. 




The moratorium is offered to all borrowers as the economy is on a pause during lock down, which comes under the definition "external conditions beyond the control of borrowers". Though not declared as such, the concession is an informal rehabilitation measure. Any such measure should give further concession on interest accrued, payable but not paid on the due date.  

 It is true that the bankers cannot be denied of their right to collect interest on monies(instalment/interest) not paid on due date till it is paid. There are also chances that if the interest on the deferred instalment/ interest portion is waived, persons who have sufficient liquidity/means to pay today might also try to enjoy the benefit, impacting the repayment cash inflows to the banks totally. 

 Under the above circumstances, my suggestion is as under: 


"The interest(overdue interest) on the deferred instalments/interest accrued portion shall be charged at simple interest at the respective bank's 3 months MCLR till that amount is paid, instead of applying the contract rate of interest governing such loans. In respect of credit card dues, the interest on the overdue portion on account of 3-months moratorium shall be charged at simple interest at the average of the top three banks' 3 months MCLR"
(end of Quote)

On the above lines or something still better, which indicate that the government/ RBI are willing to consider the hardships of genuine customers without compromising on the right of the bankers to charge interest on unpaid balance including interest applied, if a solution is offered, it might find the  acceptance of everyone.  More important, this will reduce the number of defaults as borrowers will be encouraged to pay.  After all, this is not some thing new; it is already done in respect of restructured/rehabilitated accounts by the banks all along.

Regards

V. Viswanathan


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