Over 40% of system credit and 75% borrowers to benefit from interest-on-interest concession: Crisil

Rating agency Crisil on Monday said over 40% of system credit and 75% of borrowers would benefit from interest-on-interest (compound interest) concession offered by the government. The total impact on the exchequer due to the scheme is seen at Rs 7,500 crore, according to Crisil.  After a public interest litigation (PIL) was filed in the Supreme Court, the government on Saturday issued guidelines to waive interest on interest during the moratorium period for eligible borrowers.

The benefit will be extended to borrowers with outstanding loans of less than Rs 2 crore in select categories, irrespective of whether the moratorium was availed of or not. “The cost to exchequer would have halved if waiver was allowed only where moratorium was availed of, “ the rating agency said. Reserve Bank of India (RBI) had earlier allowed repayment break for the borrowers for six months between March and August, 2020.

Malvika Bhotika, associate director, Crisil Ratings, said that extending the benefit to all eligible borrowers irrespective of whether they have availed of moratorium or not, will assuage concerns over unfair treatment that borrowers not availing of moratorium could have otherwise harboured. Krishnan Sitaraman, senior director, Crisil Ratings, said, “Crisil’s analysis shows a complete interest waiver (including interest on interest) for eligible loans up to rs 2 crore would have meant a staggering Rs 1.5 lakh crore impact. 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, he added.

The difference between compound interest and simple interest over six months from March 1, 2020 will have to be payed by the lenders to eligible borrowers. To ensure effective and timely implementation, the government has asked lenders to credit the amount to the eligible borrowers latest by November 5, 2020.

The rating agency also said that 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.