Small, but welcome relief

As the country was gearing up to celebrate Dasara, the festival that marks the victory of good over evil, the central government made an announcement on the festival eve, which came as music to the ears of loan borrowers. Acting on the directions issued by the Supreme Court of India, the Modi government came out with a scheme aimed at waiving interest on interest on various loans for the six-month moratorium period which was announced to support borrowers during the Covid-19 crisis.

The loan moratorium, which came into effect on March 23 and continued till August 31, provided a temporary relief to borrowers from the payment of monthly installments. However, banks and financial institutions charge interest on loan amounts on a monthly basis and collect it as a part of equitable monthly installments (EMIs) that borrowers pay. With the loan moratorium in place, interest charges on loans got accumulated every month. In regular practice, interest is levied on that accumulated interest in the following month and the process goes on. That means borrowers pay compounded interest on the loan amount if an installment is not cleared.

Under the interest waiver scheme, the Centre will make an ex-gratia payment of an amount equal to the difference between compound and simple interests for the moratorium period. It's a small amount, but a welcome relief for the borrowers.As per rough estimates, the ex-gratia scheme, which is applicable to loans up to Rs 2 crore as on February 29 this year, will cost the Centre around Rs 6,500 crore. The back-of-the-envelope calculations reveal that a borrower with a Rs 50 lakh loan will get an ex-gratia amount of around Rs 3,000.

Good thing, however, is that even those borrowers who paid their EMIs without availing the moratorium, will also be given the ex-gratia. That's a nice way to reward those who took pains to repay loans during the pandemic even though the moratorium relief was on offer. But the Centre should have offered a little extra amount to these regular payers.

The Modi government directed banks and all financial institutions to implement the scheme, credit the ex-gratia amount to all eligible borrowers by November 5 and avail refund from the central government.The Reserve Bank of India (RBI) also issued instructions in this regard on Tuesday.

Nevertheless, the central government needs to initiate more proactive steps and stimulus measures to revive the ailing economy at a faster pace. That's essential to generate jobs. India's economy contracted by 23.9 per cent in the first quarter. The International Monetary Fund (IMF) recently projected that the country's economy would contract by 10.3 per cent during the current financial year. That would be a huge blow to the economy. A deeper economic contraction will lead to large-scale job losses.

Therefore, faster recovery of the economy will lessen the adverse impact of the pandemic. Otherwise, banks and financial institutions will stare at more defaults and non-performing assets (NPAs) will skyrocket. Hope the Centre comes out with more economic stimulus measures. For the time being, the interest waiver move is timely.