The government’s interest waiver is too small, too late
With a PIL filed with the Supreme Court on the waiver of “interest” or compound interest during the moratorium on loan repayments between March 1 and August 31, 2020, the matter is now outside the Reserve Bank of India (RBI). Some people who have had financial difficulties during the lockdown period are exempted from having compound interest reimbursements on loans. However, when it comes to the bigger picture of compound interest, some of the issues have been overlooked in the debate.
First, when the moratorium was initially announced by the RBI for three months, the modalities were not disclosed. It was not made clear that for those three months or another three months after the renewal, the EMIs were not apologized or frozen. The borrower was only not allowed to pay the EMI for those six months. Little did the general public have a clue that if six EMI are not paid now and are paid at the end of the loan period after, say, 10 years, it is not that after 10 years there will be another six EMI due. Interest is calculated for 10 years, the amount is compounded for 10 years and the number of additional EMIs that are payable after 10 years is far more than six, depending on the interest rate, amount, duration and other factors. This awareness-raising should have been carried out as a media campaign by RBI and banks. Only people in absolute trouble with cash flow would have chosen to post the notoriety. People who chose because it is a public holiday and that “those 6 EMIs” can be paid later would not have opted for the moratorium.
Second, some banks have implemented the automatic “opt-in” system for some time. That is, the borrower was believed to have opted for a moratorium, unless the borrower opted for you were not fully aware of the interest that will be charged for a long period of time.
Thirdly, there was uncertainty among the bank employees themselves and the customers had little orientation. Calculations about the additional interest and EMIs were built into the “system” of the banks, but many employees did not understand the logic behind the calculations. That left little clarity for borrowers.
The RBI’s intentions to allow the moratorium are noteworthy as it should make people easier in times of stress. However, the way it was implemented in terms of awareness and communication did not lead to the fulfillment of the noble goals. To give an analogy to our point of view, let’s say passengers on a flight or train are stranded at the airport or train station for some reason. Then it is announced that food will be offered, which is a noble gesture in the situation. However, according to the rules of the flight or train service, the food is charged with high costs (accept this for discussion). Passengers would assume that the food is either free or paid for at a reasonable price, unless announced out loud. On top of that, if the food is served to people (automatic opt-in) who are not aware of the high costs and the tax on the food is later waived, the costs remain high. Even without compounding, the interest rates are substantial over a long period of time.
In addition, in times of stress, the court chose the humanitarian point of view, which is noble. However, the humanitarian logic was only applied to borrowers, not depositors. It can be argued that borrowers have no money which is why they borrowed, and depositors have money which is why they deposited. There are also wealthy people among borrowers who have taken out a loan to buy a house, for example. Among the depositors there are seniors who only manage with their deposits. They are stressed in a situation of easing interest rates, but their plight has not been taken into account in this debate. The bank cannot increase the contractually agreed interest rate just because the depositor is in stress.
Fortunately, the state bears the burden of the interest waiver and not the banks. Incidentally, that is also taxpayers’ money.
Joydeep Sen is a corporate trainer (debt markets) and author.
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