Moratorium: RBI orders lenders to repay compound interest to borrowers


The Supreme Court rejected on March 23 the distinction previously made by the government between small and large borrowers in the repayment of compound interest accrued during the moratorium period.

The Reserve Bank of India (RBI) on Wednesday clarified who should bear the cost of the court-imposed compound interest waiver on all loans during the moratorium period, asking all lenders to repay this component to their borrowers. Lenders will immediately need to put in place board approved policies to repay or adjust “interest on interest” charged to borrowers during the moratorium period – March 1, 2020 to August 31, 2020.

The Supreme Court rejected on March 23 the distinction previously made by the government between small and large borrowers in the repayment of compound interest accrued during the moratorium period. Icra analysts have estimated that the new repayment exercise could amount to an additional Rs 7,500 crore for loans over Rs 2 crore. The relief already given to borrowers with loans of up to Rs 2 crore cost the treasury around Rs 6,500 crore, the agency said last month.

“In order to ensure that the above judgment is implemented in a uniform manner in letter and spirit by all credit institutions, the methodology for calculating the amount to be repaid / adjusted for the different facilities must be finalized by the ‘Association of Indian Banks (IBA) in consultation with other participants / industry bodies, which will be adopted by all lending institutions,’ the RBI said in its notification.

The relief will apply to all borrowers, including those who used working capital facilities during the moratorium period, whether or not the moratorium was fully or partially used. Credit institutions must disclose the total amount to be repaid or adjusted in their financial statements for the year ending March 31, 2021.

The classification of borrower account assets by all credit institutions following the above judgment will continue to be governed by the instructions in force.

Wednesday’s circular could deal a blow to banks and non-bank lenders, who say they have yet to receive repayment from the first round of compound interest repayment, completed in November 2020. According to media reports, the IBA had asked the government to also foot the bill for the second round of reimbursement. Some bankers also hoped for a revision of the SC judgment.


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