Interest on interest: IBA sends representation to Finmin

The Indian Banks’ Association (IBA) has sent a representation to the Finance Ministry to enhance the scope of its previous ex-gratia scheme to cover the refund/adjust the ‘interest-on-interest’ charged to the borrowers during the Covid-19 related moratorium period — March 1, 2020 to August 31, 2020.

As per the Supreme Court’s judgment (in the matter of Small Scale Industrial Manufacturers Association vs Union of India & Others and other connected matters) on March 23, 2021, all borrowers (including those having loan exposure of above ₹2 crore) will be eligible for waiver of interest on interest in respect of the pandemic-related loan moratorium.

Banking sources said the payment of the interest-on-interest component by banks will set a precedent. So, IBA has suggested that they should be compensated by the government.

The government had picked up the tab towards waiver of interest on interest for loans up to ₹2 crore, irrespective of whether moratorium was availed or not, following the top court’s order in October 2020. This cost the exchequer about ₹6,500 crore.

Clamour for moratorium

“There is an additional load on banks due to the interest-on-interest provision. Now the issue is not about the amount but of setting a precedent, especially when we are in the midst of the second-wave of Covid-19 pandemic and there is once again the growing clamour for loan moratorium. We are still waiting for some more clarification; maybe we will get some reversal benefit on the interest-on-interest provision,” said a bank executive, who did not wish to be named.

While, the Centre had earlier picked up the tab for waiver of interest on interest on loans up to ₹2 crore, this time around, lenders have to bear the cost.

Most banks and NBFCs have already made provisions for the interest-on-interest payment in the fourth quarter of 2020-21 but are likely to implement it this quarter after the completion of the statutory audit.

Ex-gratia payment under the October 2020 Scheme covered borrowers (micro, small and medium enterprise, education, housing, consumer durables, credit card dues, automobile, personal loans to professionals and consumption loans) having sanctioned limits and outstanding amount of up to ₹2 crore (aggregate of all facilities with lending institutions) as on February 29, 2020.