IBC resolutions and haircuts

Waiver of interest on instalment/interest payable during moratorium period 

Whether the banks are right in charging interest on instalments or interest that became due and payable during the moratorium period is hotly debated in the Supreme Court and also in the media. As per reports, the government and regulator appear to have taken a stand that if the interest on “instalment not paid/interest charged in the account” is waived, it will affect the financial position of the banks badly, which are already under stress due to substantial increase/expected increase of stressed assets. The argument is weak on several counts.

1.    The court might say the stress in financial assets and consequent decline in the revenue has to be addressed by owners of the banks (including the government) and cannot be passed on to the honest borrowers, who have nothing to do with NPAs.

2.    Even if the court buys this argument, it might still say that not all banks have the same level of NPAs/capital adequacy levels; so let stronger banks extend the waiver first. And let the government fund the shortfall to the weaker banks to extend the waiver later on.

Probably to buy time and also to avoid being pictured wrongly in the public, the central government has now set up a panel of experts to look into the issue of interest being charged on deferred instalments/applied interest.

 In my opinion, as a layman, the simple issue is unnecessarily complicated.  Instead of

• explaining why the interest is charged on “instalments not paid/interest charged on due dates” and
• assure the highest court in India, that the banks will be advised to look into the whole issue on a case to case basis, as the financial hardships differ from individual to individual, family to family and business to business,

dragging the matter endlessly will only worsen the situation.

My thoughts on the issue are as under:

Underlying Principle: The basic principle underlying collection of interest on non-payment of instalment/interest debited in the account is that the owner of funds (banker or depositor) is denied of the cash inflow, which he could have deployed profitably, had he received the funds on due dates. Overdue interest collected also serves as the distinction to differentiate payments made on due dates and afterwards. To understand the issue of interest on interest unpaid, let us take the example of deposits accepted in the banks. Banks pay interest on fixed deposits and savings deposits.

In fixed deposits, the customer can choose to collect the interest at periodic intervals before maturity of the deposit or choose to collect the same along with the principal on the date of maturity. If he chooses the latter, the interest is added to the principal at quarterly intervals and interest is calculated on the revised principal every quarter. The reason is simple.  Interest portion that should have been paid to the depositor on due date, lies in the hands of the banker and he pays interest on the interest portion also at original agreed rates

In Savings Deposits, the interest is credited to the account periodically and the entire balance after credit of interest is eligible for interest calculation from that date.

The above principle is applied in respect of loans and running accounts like overdraft/cash credit by the banks as a lender.  Obviously, there is nothing wrong in charging interest in the above fashion.

Suggestions: Of course, the matter has assumed importance due to the unprecedented pandemic situation leading to lock downs, loss of jobs/business/revenues. My suggestions are as under:

1. Public Sector, private, foreign and co-operative banks occupy the scheduled commercial banking space. If the waiver of interest during moratorium is considered for borrowers, it has to be applied to all. Unless the amount involved is compensated by the government, the issue is likely to be contested, since it goes against accepted commercial principles practiced from time immemorial. 

 2.   Compensation by the government will again only lead to higher fiscal deficit, which is already impacted by the huge shortfall in collection of direct and indirect taxes

3.    Applying the waiver uniformly brings the affluent borrowers on par with those in dire need and have actually suffered.  The lender is always in a better position to understand the financial health of the borrower and will consider waiver or reduction of interest on the dues that fell in the moratorium period on a case to case basis, during the process of restructuring, now permitted by RBI. The bankers will be informed of the genuine concerns of the Supreme Court in considering the issue and to be sincere and humane in their approach, while considering rephasement/ restructuring requests from the borrowers.

4.    Any decision to extend interest waiver on instalment/interest that fell due during moratorium period will open the gate for requests from borrowers, who did not avail the offer of moratorium. They might contend that they be compensated for paying on due dates (instalment/interest), as they paid the same by resorting to liquidating their investments or by borrowing externally to avoid interest burden.

 

Regards

V.Viswanathan 

11th September 2020