Govt's ex-gratia payment of interest on interest to cover 75% borrowers

The government’s decision to bear the cost of waiver on small-borrower loans has come as a relief to lenders
The government’s ex-gratia payment of interest on interest concession to customers with outstanding loans upto Rs 2 crore will cover 75 per cent of borrowers in the system, according to rating agency CRISIL.

From a borrower’s perspective, the benefit would be relatively higher for those who had availed of higher-yielding loans. Consequently, borrowers of unsecured, micro and gold loans will benefit more than those who had taken home loans, CRISIL said.

The tab that the government will pick-up for such concession is estimated at about Rs 7,500 crore, according to CRISIL’s analysis.

The government is giving this benefit to provide relief to small borrowers impacted by the coronavirus (Covid-19) pandemic.

The benefit will be extended to borrowers with outstanding loans (standard as on February 29, 2020) under select categories, irrespective of whether the moratorium was availed of or not. Such loans account for more than 40 per cent of systemic credit.
CRISIL in a statement, said the cost to the exchequer would have halved if the waiver was allowed only where moratorium was availed of.

Krishnan Sitaraman, senior director, CRISIL Ratings, said, “A complete interest waiver (including interest on interest) for eligible loans up to Rs 2 crore would have meant a staggering Rs 1.5 trillion. This could have posed significant challenges for the government as well as the financial sector. Waiver of only interest-on-interest will have a much milder and manageable impact.”

The government’s decision to bear the cost of waiver on small-borrower loans has come as a relief to lenders. The potential burden on lenders – already facing profitability pressure and asset-quality challenges because of the Covid-19 pandemic and challenging macroeconomic environment – has eased, it added.

Malvika Bhotika, associate director, CRISIL Ratings, said that extending the benefit to all eligible borrowers will assuage concerns over unfair treatment that borrowers not availing of moratorium could have otherwise harboured.

While the waiver will offer a modicum of relief in terms of cash flows, repayment discipline among borrowers after the moratorium ended – and thus medium-term delinquencies at banks and NBFCs – will bear watching, it added.

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