Profiteers of the pandemic

The country’s apex Supreme Court is yet to decide on a waiver of interest charges on equated monthly instalments during a Reserve Bank of India announced moratorium scheme on almost all loan repayments, a direct fallout of disruptions caused due to the pandemic.

The RBI has submitted to the Court that waiver of interest during the moratorium could lead to loss of 1 per cent of the nation’s gross domestic product. Bankers have argued that the courts must not intervene in matters of such specialisation, in which depositor interest is to be protected over that of a borrower. The Supreme Court has since indicated that it will pursue the waiver of a much smaller amount: the interest on interest charged on postponed repayments.

The moratorium has permitted lenders to postpone loan repayment instalments falling due between 1 March and 31 May. This was later extended by the RBI by another three months. There will be no impact on borrower credit ratings during this time, even if they were to technically default on loans. Bank balance sheets continue to be sound too, as they do not have to account for such defaults as non performing assets either.

This is the calm before the storm. The second largest public sector lender, Bank of Baroda, has already provided moratorium to 65 per cent of its customers by value. Bank of Baroda followed an opt-out policy, wherein every customer (barring NBFCs) was allowed to be part of the moratorium. Another private sector lender IDBI Bank has said that 68 per cent of its total loan book is under moratorium. In fact, the country’s largest lender State Bank of India has moved an intervention in the Supreme Court, batting against even the allowance of interest waiver.

The world, and the country as a part of it, is witnessing an unprecedented crisis at a scale that few were prepared for. Many businesses, with factories and offices shut in a lockdown but salaries to pay, are in no position to service debt. It will be a while before consumption picks up and demand recovers to cover supply; only then can growth take place.

The RBI’s moratorium is largesse that has done the banker good. The regulator has not asked the banks to write off loans – which is the fallout of miscalculated and mispriced risk like it would be in the case of a pandemic. Instead at a time when demand for loans was hitting the bottom, from before the pandemic began, it has rescued the banker community.

By allowing the financial system to load excess debt, on the backs of a population that has yet to see it coming, instead of pursuing ways to reduce the burden of debt on the people in a crisis, the path chosen is preferable to the RBI as well as to banking profits.  

Bankers argue that depositor interest is paramount, as it should be. But the Deposit Insurance and Credit Guarantee Corporation has raised its deposit insurance coverage to R5 lakh per depositor. Most certainly, in the case of small depositors, the banks take little risk on their behalf, even while offering interest rates on such savings deposits that are at times lower than even the inflation rate. Current account deposits offer no interest.

Secondly, banks must accept that they are part of a risk distribution process. With unemployment levels at an all time high, business at an all time low, they cannot be the only ones to come out clean. By all means, it is individuals and businesses that take the primary risk for growth, and for whom returns are not constrained as they are for a bank. But to have a bank take no risk in a pandemic, and the borrower bear the entire burden, is outrageous. Surely the bank must account for its share of risk taking.

A rudimentary analysis of a 20-year home loan at 9 per cent interest taken a year ago with six new instalments from the moratorium would result in over 35 new EMIs. The amounts are higher for more recent loans and higher rates. A loan at 12 per cent would translate into 83 more instalments if six instalments were skipped.

The system is already infamous for not identifying a non-performing loan at Rs10, but to let it “evergreen” until it turns into a default of Rs100. It is important for the Court to decide if the bankers’ arguments are less to protect financial stability and more to protect profits. For it is such recklessness that gives bankers the bad name that they manage to earn for themselves.