The Reserve Bank of India (RBI) on Wednesday cleared the air on who stood to bear the cost of the court-mandated waiver of compound interest for all loans during the moratorium period, asking all lenders to refund this component to their borrowers. Lenders will have to immediately put in place board-approved policies to refund or adjust the ‘interest on interest’ charged to borrowers during the moratorium period – March 1, 2020, to August 31, 2020.
The Supreme Court had on March 23 dismissed the distinction earlier made by the government between small and large borrowers in the context of refunding compound interest accrued during the moratorium period. Analysts at Icra have estimated that the fresh refund exercise could be to the tune of an additional Rs 7,500 crore for loans of over Rs 2 crore. The relief already extended to borrowers with loans up to Rs 2 crore has cost the exchequer an estimated Rs 6,500 crore, the agency said last month.
“In order to ensure that the above judgment is implemented uniformly in letter and spirit by all lending institutions, methodology for calculation of the amount to be refunded/adjusted for different facilities shall be finalised by the Indian Banks Association (IBA) in consultation with other industry participants/bodies, which shall be adopted by all lending institutions,” the RBI said in its notification.
The relief shall be applicable to all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed. Lending institutions shall disclose the aggregate amount to be the refunded or adjusted in their financial statements for the year ending March 31, 2021.
Asset classification of borrower accounts by all lending institutions following the above judgment shall continue to be governed by the extant instructions.
Wednesday’s circular could come as a blow to banks and non-bank lenders, who claim to have not yet received the reimbursement for the first round of compound interest refund, completed in November 2020. According to media reports, the IBA had requested the government to foot the bill for the second round of refund as well. Some bankers were also hoping for a review of the SC judgment.