Interest on interest reversal may be a slow and painful process

Will banks reverse the interest on interest to millions of customers before 5th November? After the Supreme Court verdict, the government has agreed to bear the cost of interest on interest but it's going to be a tough task for banks to reverse the charges, and may miss the deadline.

Amol Dethe
  • Updated On Nov 2, 2020 at 09:47 AM IST
Read by: 100 Industry Professionals
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The Supreme Court said to the government that 'Common man's Diwali is in your hands' on the case related to Interest on Interest charged by banks during the moratorium. Adhering to the top court's verdict, the Department of Financial Services has also issued the guidelines to banks, explaining the strategy for the reversal activity. Such as, the reversal of interest on interest charges should cover only from March 1 to August 31 and should be applicable for the loans up to Rs 2 crore. But do banks have a robust system and the willpower to reverse the charges? In my view, banks will face two major problems. First is adjusting accounts with profit and second is technology. Let me explain.

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Interest reversals call for changes in books
In the current situation, there are two kinds of borrowers, first who actually paid all their dues including the interest on interest charged by the banks, and the others who didn’t. For those who have paid their dues, banks have already added that into their accounts. In fact, it’s also visible in banks' profits in the September quarter. Now the challenge for the banks is to reverse the money to the borrowers which they have already shown in their books. Banks will have to reverse their accounts government has asked them to reverse it before November 5. The eligible borrowers are from different segments such as housing loans, auto loans MSME, and credit cards. The customers are in a few million and the reversal amount is in the tune of Rs 6500 crore. This is a Herculean task for bankers to reverse the money.

Changes in the tech platform
The other problem is the technology platform. Under the current system, bankers can’t reverse the money. The loan repayment is a tech platform that is an automated program. It adds interest automatically as it is written in a compounding manner. Bankers never faced a situation where they had to reverse what they have charged. Hence the bankers need to make the changes in the IT system. They will have to calculate and most likely rewrite the program specifically to reverse the charges to transfer it automatically. Though banks have the backend support of top IT companies, it may take some time.

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Bankers slow strategy of reversal
In my observation, when it comes to transmission or reversal of charges banks generally go slow. There are always deliberations on why don’t banks transmit the benefits instantly and reasonably when RBI reduces the repo rate. RBI has also taken a proactive approach and asked bankers to speed up the transmission process but bankers have taken their own sweet time. Not just repo rate transmission but ATMs too. In many cases where the cash is not dispensed by the ATM but the customer's account is debited, bankers and the system take its own time to reverse the charges. The reconciliation used to take more than a month to settle the disputes. Considering the major issues here, last year, RBI directed banks to reverse the money in T+ 5 days and also imposed a penalty of Rs. 100 per day if they fail to do this. Considering this background I believe that banks will take some time to reverse what the government has indicated.


Editors View is a weekly column written by Amol Dethe, Editor, ETBFSI. Click here to read his previous columns.

  • Published On Nov 2, 2020 at 09:46 AM IST
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