Do not ask the SC for a loan waiver

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If you borrowed money as a home or business loan, you are contractually obligated to repay that loan. The repayment is made over a period of time, so you also pay the time value of money i.e. interest. Due to the foreclosure, GDP for the three months of April to June fell 24%. For many people, there was no income. According to data from the CMIE, 12 crore people lost their jobs in April. Imagine if you were running a restaurant.

Suddenly there were no more customers. You still have to pay rent, electricity and wages. And of course, you have to pay interest and EMI on your loan, which is necessary to run the business.

Imagine if you made unbranded shirts to supply to a large retail chain. You bought the fabric, buttons, collars, thread, and made 10,000 shirts for delivery.

And then the retail chain goes back, cancels the order, because all outlets and malls are closed. So as a small clothing supplier you are stuck with inventory. You try to collect the payment, but it is indefinitely delayed. You can try to sue your client or take them to insolvency court.

But the government suspended the Insolvency and Bankruptcy Law (IBC) for nine months. Thus, no IBC case can be brought against defaulters.

Failed businesses, people losing their jobs and their income – this is the story of the Covid-induced recession.

Now think of the banks. The Reserve Bank of India is supposed to ensure that banks remain sound and solvent. If there are a lot of defaults, the banks will suffer losses and there will be a domino effect. Normally, banks are supposed to report bad debts to the RBI even if installments are delayed by more than 90 days. Once they anticipate that a loan will go badly, they must begin to build up provisions on their own funds, to eventually cancel that loan. To avoid the domino effect of bad debts triggering coercive collections, liquidation of collateral, forced repossession, the RBI has authorized a moratorium. Word moratorium means stop the clock. This meant that borrowers could suspend their regular repayments for six months. Once the economy and incomes start to recover, they can resume payments. The “bad debt” rule would not apply during the moratorium. But that would mean that interest would continue to accumulate. The payment of interest is nothing but the time value of money. A moratorium means an extension of the repayment period, which means that additional interest must be paid later. It’s like extending the term of the loan. But some borrowers have moved the Supreme Court request relief from interest due during the moratorium. In fact, they also asked for a waiver of the interest that must be paid on the interest. These are not small numbers. The number of loans that were on moratorium was around 38 lakh crore. The total amount of accrued and unpaid interest for the six month period is approximately Rs 2 lakh crore. How can you just give it up?

Most of the moratoriums concerned loans from public sector banks, who are already in trouble. Many are losing money. If they have to absorb the loss of Rs 2 lakh crore in interest, it will affect depositors and shareholders, and ultimately taxpayers. This is because the PSU bank recapitalization injection will have to be done by the Indian government. Incidentally, the interest on the interest itself is around Rs 5,000 crore. This money also belongs to depositors and shareholders.

If you steal money that belongs to depositors and shareholders, you will suffer the fate of Punjab and Maharashtra Cooperative Bank. Of course, in the case of PMC Bank, there was outright fraud, where massive loans were made to a few select borrowers, and that money was lost. Most of PMC Bank’s hapless depositors, including retired retirees who had put all their savings in deposits, are in deep distress. They sit in dharna and protest against the RBI for not being vigilant enough to prevent fraud. Why didn’t the regulator catch the crime before it caused a big hole?

Now the RBI has authorized a moratorium in its wisdom to help people manage their cash flow in a recession caused by Covid. But the moratorium should not be converted into a loan waiver. Indeed, many borrowers have chosen not to resort to the moratorium option. They continued to pay their IMEs. Besides, how do you ask the Supreme Court to make a business decision that will affect public sector banks and their depositors? If any relief on the repayment is to be given, then it should come from the central government treasury, which is the owner of the bank. But it would also be unfair to taxpayers, workers who repay loans or those who do not have recourse to the moratorium.

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