No free lunches in SBI's loan restructuring; borrowers to pay extra interest

There is no such thing as as free lunch with banks, which is essentially a business of paying depositors from whatever they earn from the borrowers of retail and corporate loans.

Even as the matter of 'interest waiver' during the six-month loan moratorium is before the Supreme Court, the largest bank in the country, the State Bank of India (SBI), has announced an additional interest over and above the current pricing (interest rate) for borrowers applying for loan restructuring.

The SBI, which was first off the block to announce the restructuring scheme for home, education, auto and personal loans borrowers has said that the bank will charge additional interest of 35 basis points over and above the current pricing for the remaining tenure of the loan.

The bank has reasoned that it is charging this additional amount in order to offset partial cost of additional provisions required to be made by the bank. Other banks are likely to follow suit.

The Ministry of Finance had earlier set up a three-member expert committee under former CAG Rajiv Mahrishi for making an overall assessment on the moratorium loan interest waiver matter. The issue is whether banks can charge interest on interest.

The sword of an exemption or a Supreme Court decision in favour of borrowers is already hanging over the head of banks; these would mean loss of interest for banks. The banks have various kinds of depositors from savings to fixed where it pays market interest and based on its cost of fund and other cost, margin and risk, it prices a loan.

A home loan borrower pays less interest because of the secured mortgage wheres a credit card or personal loan borrower pays higher because of the unsecured nature of the loan. The banking sector is already reeling under high non-performing loans.

The individual loan restructuring facility is available to only COVID impacted borrowers who have lost their jobs, received salary cuts or suspension of salary, closure of business, etc. In case of self-employed borrowers, the bank will look at business closure during lockdown or reduced activity of units, shops or business establishments.

Under the SBI's scheme, the bank would be providing moratorium of up to a maximum of 24 months, rescheduling of instalments and extension of tenure by a period equivalent to the moratorium granted subject to a maximum of 2 years.

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