Banks Told to Share Details of ‘Interest on Interest’ Charged

The finance ministry has asked banks to share details of their board-approved policy on refund or adjustment of ‘Interest on Interest’ charged to borrowers during the moratorium period March to August 2020.

An official confirmed the development and said that information has been sought on the methodology used for calculating the amount to be refunded or adjusted for different facilities.

“Banks are expected to provide details before the end of this quarter.

…We have asked if the Indian Banks Association (IBA) has formulated any policy in this regard in consultation with other industry participants,” the official said.

On account of the stress due to the Covid-19 pandemic, the Reserve Bank of India had announced a loan moratorium scheme to grant temporary relief to borrowers for payment of instalments due between March and August 2020.

In March this year, the Supreme Court refused to extend the moratorium beyond August 31, 2020, but directed lenders to waive interest on interest for all borrowers.

“We also want an assessment of the liabilities of state-run banks,” said the official.

As per the RBI guidelines, lending institutions must disclose the aggregate amount to be refunded/ adjusted in respect of their borrowers based on the reliefs in their financial statements for the year ending March 30, 2021.

In a recent report, rating agency ICRA said the liabilities arising on this account across all lenders are in the Rs13500-14000 crore range and the relief already extended over loans of up to Rs 2 crore has cost the exchequer about Rs6500 crore.

Earlier this year, IBA had made representations to the governments seeking compensation on payments of the interest on interest component.

“It was expected that the government will bear partial, if not full, load of the total amount,” said a banker aware of the developments.

The government, however, is not inclined to bear this cost as it already compensated banks for the interest on interest they had lost on loans outstanding below Rs 2 crore.

The banking sector regulator has already directed lenders to put in place a board-approved policy to refund or adjust the interest on interest charged to the borrowers during the six-month moratorium, in conformity with the Supreme Court judgement. S-ET

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