INTEREST OR NO-INTEREST OR
HOW MUCH INTEREST TO CHARGE DURING MORATORIUM

          There is great confusion about charging interest, not charging interest or how much interest to charge during moratorium allowed as a relief measure provided to suffering borrowers as public in general as immense hardship had to be faced by public at large (borrowers included) due to prolonged lock downs and other containment measures were imposed by the governments without choice to check the spread as well as damages to lives owing to the Covid-19 pandemic and the economic activities were entirely in seize. In India, the moratorium has been allowed in two 3-months terms (total six months period) from March to August 2020, by RBI (Reserve Bank of India) the Regulator of Banks and Financial Institutions (the lenders). As of to-day there is no more extension announced of moratorium beyond August’2020 and the worsening ground situation, while the virus has in fact has found in-road even to rural India, warrants that it should be extended until December 31, 2020 and to test the waters there after.

One school of thought says there could be interest waiver provided to borrowers during the moratorium as everyone has suffered due to seized economic activity and when people at large have suffered they cannot be burdened with more burden of interests during moratorium period. The other school of thought is from Banks and Financial institutions and its Regulator, RBI who are bulldozing that interest waiver during moratorium will impact their business with substantial revenue loss and therefore there should not be any interest waiver.

The matter has gone to Supreme Court of India by some PILs. I am not making any comment on adjudication of Supreme Court most honorably. But the Government of India has maintained silence on this matter till now. The Chairman of a private bank, who started as a housing finance company initially and later was licensed as a Private Bank has been vehemently saying to RBI that people are misusing the moratorium, and his view is a generally wrong statement and his generalized statement about public in general is wrong in general public context and should not be bought by RBI in its face value, as he is saying for the interest of his private bank and not in public interest of India. The Vice-Chairman of another private bank, who started as a Securities Trading Company initially and later was licensed as a private bank has been making similar views to RBI, but his generalized views can’t be bought by RBI in public interest of India. These private banks are known to create huge wealth for few individuals in India or external investors and they can never be the mouth of suffering Indian public in general living at middle or lower strata of Indian society. May be some borrowers could afford to pay during moratorium and they are in any case paying. It cannot be denied that a few borrowers may be, could afford to pay and holding during moratorium, but their number would be meager. But a very large majority of lower and middle strata of society who are borrowers and have suffered in hardship during the pandemic needed the moratorium justifiably.

It may be remembered, that during Demonitization in 2016, RBI had also given  6-months (3months + 3 Months) moratorium. The Pandemic of Covid-19 is much more catastrophic in effect for public and economy and it should not be forgotten by the Banks and Financial institutions, RBI and the Government in General. Moratorium is not a mercy done to people who are borrowers, they are generally citizens and suffering lots for any reason. If they had money to fend themselves and would not be suffering, they would not have borrowed, it has to be understood as a society. The borrowers are consumers and the Banks (along with depositors/investors) are suppliers; both have to co-exist. None of both side (one side) can exist alone, it needs to be understood.

Now the question comes, how much interest to be charged during the moratorium or not to be charged at all. Some of the Banks and Financial institutions have tasted blood by charging even exorbitant interest rates (in addition to simple interest rate)  as penal interest over and above normal interest rate during the 6-months moratorium period given during Demonitization in 2016, as RBI did not control it and left to the lenders to decide as they wanted. The Banks and Financial institutions cannot be allowed to taste same blood and exploit the vulnerable borrowing public this time for the moratorium allowed during pandemic of Covid-19. It is obligatory for RBI to control and fix any interest if at all to be charged during moratorium and it cannot be left to the Banks and Financial Institutions to decide whatever they want. The liability of interest waiver as estimated and published in public domain for these six months moratorium already given will be around Rs 200000 Crores. The Government has to decide if it can take over this liability and allow interest waiver for these six months of moratorium allowed and in that case the Government has to compensate the Banks and Financial institutions to alleviate their burden, that should be a good measure in the larger interest of the public at large. In fact, if calculated on cost of capital basis the amount would be much less. In case the Government cannot manage and the public have to be charged interest during moratorium, in that case the Banks could charge simple interest ( no compounding ) at the rate they pay to their depositors, on-break-even and cost of capital basis, that should be controlled by RBI and the Banks and Financial institutions can not deviate as they wish. The Govt can decide to reimburse a part/or full of salaries and establishment expenses of Banks and Financial institutions depending on their standing and ability to sustain, in order to lessen their burden so that they don’t crash and survive in weaker cases. The Banks and Financial institutions should be impressed to be with the Nation with such a formula, during the unprecedented crisis and should not think about only the wealth creation of few individuals or external investors as some private banks explained above have bulldozed the RBI.

About the Author : Dr. Nimain Charan  Biswal is a B.Sc.(Agri. Science and Technology). M.B.A. and Ph.D.( Management Area ) by qualifications and he has 34+years of work experience in both  industrial and development sectors in diversified fields of social importance. He has been educated at Orissa University of Agriculture and Technology (OUAT)-Bhubaneswar, Institute of Rural Management Anand (IRMA) and Gujarat University ( with Resource Support of IIM-Ahmedabad ). Dr.Biswal is further educated at IIM-Calcutta, XLRI-Jamshedpur, Apple Computer Industries and Spar Inc., USA. He has worked for reputed National and International Organisations in Senior/Top Management Capacities. He is a management  expert, a prominent professional of India and known Internationally as well. He lives at Mumbai in India.