Interest Waiver To Boost Economy, May Hurt Credit Culture

The Centre’s decision to waive interest-on-interest on the six-month loan moratorium would help jump-start the pandemic-hit economy; however, it could hurt the country’s credit culture, warned banking and finance experts.

Many felt that the government needed to clarify whether this interest waiver would apply to NBFCs as well. The industry is waiting for clarity since hearing on the matter was deferred to October 13 by the Supreme Court.

Ram Kewalramani, Managing Director and Co-Founder, CredAble, said: “It could be a shot in the arm for a specific class of borrowers amid the growing clamor and demand for a robust and practical fiscal stimulus which would have a material impact to the economy in general.”

“With less interest burden to service for the moratorium period, medium and small scale enterprises (MSME) will now be in a position to focus on getting back lost businesses with renewed confidence and optimism. Retail borrowers are also an essential component in this equation. Less interest burden would mean more confidence in overall spending. It is primarily important to bolster a consumption-based economy like ours,” he said.

Vivek Banka, Founding Member, GoalTeller, said that the act of ‘handholding’ by the government has undoubtedly saved several households from the brink of insolvency. It has also saved banks from declaring non-performing assets.

“There will be certain unwarranted implicit effects on the economy. With further widening of the fiscal deficit, consumers will eventually suffer because the waiver cost will be compensated either by a cut in spending by the government or increased taxes. It may also harm the credit culture of the country,” he said.

Last week the government informed the Supreme Court that it was ready to waive interest-on-interest on loans up to Rs 2 crore for the six-month moratorium period, which ended in August. The waiver will apply to education, housing, consumer goods and auto loans and credit card dues. Moreover, loans taken by Micro, Small and Medium Enterprises (MSMEs) would also come under the waiver, the government had said.

Kewalramani said that he would wait for the government to release details and modalities of the Rs 2 crore limit and other waiver features. “Distribution and execution of these are of paramount importance, especially in such precarious and unprecedented times,” he added.

Calling it a welcome step, Vikas Wadhawan, Group CFO, Housing.com, Makaan.com and PropTiger.com, said it would provide some respite to customers who faced financial difficulties following job losses, salary cuts or business disruptions and had opted for the moratorium.

“While it’s not clear what benefit will be given to customers who have paid their EMIs on time during this moratorium period, it seems like the government is considering to extend the benefits to those customers as well to reduce their interest burden,” he said.

Arpit Arora, Passive Income Coach and Founder of AskTheWiseGuy, said that while it was a good initiative, those who paid on time might feel victimised. However, the government had earlier clarified that even those who paid their equated monthly installments (EMI) during the moratorium period would benefit.

“In totality, the move will help the economy by providing a boost. The key catalyst in economic recovery would be increased consumer spending. It will drive higher industrial output and aid in kickstarting the economy,” Arora said.

“People are under stress due to the pandemic. They are also hassled by a slow revival of their livelihood activities. Any help from the government or the central bank would be useful. It would help reduce the interest burden on loans in this challenging time,” said Manoj Nambiar, Managing Director, Arohan Financial Services.