Moratorium: RBI orders lenders to repay compound interest to borrowers

The asset classification of borrowers’ accounts by all credit institutions following the above judgment will continue to be governed by existing instructions.

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

The Supreme Court had rejected on March 23 the distinction previously made by the government between small and large borrowers in the context of the reimbursement of compound interest accrued during the period of the moratorium. ICRA analysts have estimated that the new repayment exercise could be in the range of an additional Rs 7,500 crore for loans over Rs 2 crore. Relief already given to borrowers with loans of up to Rs 2 crore has cost the Treasury around 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 credit institutions, the methodology for calculating the amount to be refunded/adjusted for the different facilities should be finalized by the Association Banks of India (IBA) in consultation with other industry participants/bodies, which will be adopted by all lending institutions,” the RBI said in its notification.

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

The asset classification of borrowers’ accounts by all credit institutions following the above judgment will continue to be governed by existing instructions.

Wednesday’s circular could be a blow to banks and non-bank lenders, who say they have not yet received reimbursement from the first round of compound interest reimbursement, 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 were also hoping for a review of the CS ruling.

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