Repay compound interest paid by borrowers, IBA tells banks.

MUMBAI: The Indian Banks Association (IBA) has asked its members to exclude the moratorium period while calculating the number of days for deciding the status of a non-performing loan. 

In a letter dated March 26, the association has told banks that it will ask the government to compensate lenders for returning to borrowers the interest on the interest payable on installments during the moratorium period. 

In its management committee meeting on March 25, the IBA had decided that banks should refund any compound interest,interest on interest or penal interest if charged on borrower accounts. 

In the case of borrowers with outstanding below Rs 2 crore, the government had notified repayment of interest on interest by lenders, irrespective of whether the borrower had been charged the compound interest. The government had also said that it will compensate all lenders for this payment under an ex-gratia scheme. 

“The moratorium period (March 1-August 31, 2020) to be excluded for reckoning number of days for deciding NPA status under prudential norms. This is regardless of whether the moratorium was requested or not by the borrower,” the IBA told banks. 

Bankers told TOI that there were indications that the government might not compensate lenders this time. Banks are likely to make provisions for the compensation in their books for the current financial year although the actual payout is likely to happen in April 2021. 

The exclusion of the moratorium period for calculating the age of NPA will help both banks and borrowers. Many borrowers have been holding back from payment in the hope that there would some relief from the Supreme Court. 

In terms of RBI norms, banks have to steadily increase the provision for a stressed loan as the days past due increase. The first level of provisioning (usually 15% of the loan amount) is made when it is 90 days overdue. Every quarter after that the provisions increase as the loan moves from sub-standard to loss.