Indian banks are hesitating in waiving the interests on loan repayments, as the central Government is willing to waive the interest in select sectors.
As the Indian banks fear, this might push them to more difficulties during this Coronavirus scenario, as it would add more operational costs and spark litigations as well, says Reuters in a report.
The Indian Government in a 2nd October filing to the Supreme Court has said that it is amending the clause in a relief plan, which allowed the distressed borrowers to skip repayment of the loan for six months.
However, there is a catch.
The Government is charging those borrowers to pay ‘interest-on-interest’ (compound interest) on the delayed payments. This move is putting the already distressed borrowers in bigger debt.
As the amended rules suggest, it will omit the compounding interests for the small businesses for a period between March-August 2020. It will also waive the compounded interest for some personal loans as well.
Because of these changes, the Government has to bear a cost of more than $1 billion, as the analysts predict. This could dent the already ailing Indian economy further.
The Indian banks are already burdened with over $120 billion worth bad loans. In such a scenario, the Government’s move to waive the interest would create further pressure on them, stressing the Covid-hurt balance sheets.
Why Indian banks are opposing the plan
According to the Indian banks, in case of a waiver, getting back the money from the Government could be a painful exercise. Apart from that, the banks will also need to recalculate the millions of loan amounts again.
As the banks say, if the loan interest waiver is implemented, there will be a lot of work pressurizing the sector and it will make the Government poorer only.
The Indian banks cite the example that in case of farm loans, the banks need to wait 9-24 months to get the funds back from the Government.
Besides all these, the legal costs of the Indian banks are also rising as the lawsuit files are piling up.
While the state-owned banks get backing from the Government, the private banks are here for profit. These private banks will have different loan calculations and those would be challenged by the Government.
So far, the interest waiver could ultimately end in a more complex situation with increased operational costs for the Indian banks and crores of revenue loss for the Government as well.
Shock to lending culture
Indian banks are concerned that such kind of waivers may dampen the culture of lending in India. As they fear, if the waiver is implemented, in future, in case of natural calamities like flood or drought, the borrowers who can pay back, may not be keen to do so, knowing that the Government will step in to rescue them.
Therefore, instead of waiver, they advocate for other ways to help the borrowers who are in need. These include Government providing subsidies, loan restructuring etc.