Govt’s diabolical game on moratorium stands exposed: Focus on optics and not genuine help in times of crisis

The Modi government’s diabolical game on bank loan moratorium stands thoroughly exposed. It has indeed been trying to pull the wool over people’s eyes on the issue.

To see the game through, it is enough to consider what would happen if a borrower defaults repayment in normal circumstances. The bank, or whoever is the loan provider, charges penal interest on the defaulted amount, which would mean charging compound interest on the already accrued interest. Moratorium or no moratorium, the customer always has the option of defaulting as long as he or she is ready to part with additional payment on the defaulted amount.

This is what happens when the Centre’s fancied moratorium is in place too. As soon as the moratorium was supposed to end on August 31, the banks were ready to ask customers to pay up compound interest immediately or be considered NPA, with its natural consequences, including foreclosures.

Mercifully, the Supreme Court intervened and ordered that no account would be categorised as NPA for the next two months and banks cannot initiative coercive action pending the disposal of the petitions seeking relief from penal interest for the duration of the moratorium. It is to be noted that the court has come to the aid of the people, while the government continues to look away.

Interest on interest has been a highly propitious opportunity for the banks, which are perhaps the only ones making money out of people’s misfortune in the wake of the pandemic. The government as well as the lenders are seeking to give compound interest the fancy name of contractual interest to justify penal interest and at the same time claiming that compound interest and penal interest are not one and the same. They can call it anything, but the unfortunate fact remains that it amounts to fleecing the customers in their worst crisis as the interest becomes penal compounding interest in the event of non-payment.

The government has been playing hide and seek with the court as well as public, taking cover behind the RBI, which has been accused of acting like the agents of the banks, helping them making more money, rather than perform its role as the regulator. The Centre’s prevarication on the issue has been ominous. In fact, the court rebuked the government for not clarifying its stand on the interest issue. The government has been seeking adjournment after adjournment and telling the court that it shall seek instructions from the finance ministry.

The RBI has been saying it is waiting for figures from the government on the number of people who have taken the loans, but the information has apparently not come forth yet. The court even remarked that the response of the government amounted to shelving the issue and remarked that the Centre was ‘hiding’ behind the RBI.

“Moratorium and penal interest cannot go together. RBI will have to clarify,” Justice R Subhash Reddy, who is one of the judges on the bench, along with Justice MR Shah, said. The court said that there was no merit in charging ‘interest on interest’ for deferred loan payment instalments during the moratorium period announced in wake of the pandemic and that once a moratorium is fixed, it should serve the desired purposes and the government should consider interfering in the matter as it could not leave everything to banks.

One of the petitioners had sought a direction to declare the portion of the RBI's March 27 notification requiring borrowers to clear their dues as of a September 1 as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which creates hardship to the petitioner being borrower and creates hindrance and obstruction in 'right to life' guaranteed by Article 21 of the Constitution’.

The RBI maintains that it would not be prudent to go for a forced waiver of interest risking financial viability of the banks. In a response to the apex court’s query, the RBI, however, said it was taking all ‘possible measures to provide relief with regard to debt repayments on account of

the fallout of Covid-19’ without specifying what these measures were. But when it came to interest waiver, it was more specific: it was not prudent to go for a forced waiver of interest, which it says will risk the financial viability of the banks it is mandated to regulate, and put the interests of the depositors in jeopardy.

One has to state that the Supreme Court has been more proactive in responding to the problem than either the government or the RBI. Thanks to the apex court’s efforts, borrowers have received a forced extension of the moratorium and an interim relief that no account would be tagged as NPA until further orders even if there default. Most of the borrowers must have been on the brink of defaulting or close to the 90-day overdue mark for classifying loans as non-performing when they got the reprieve from the Supreme Court.