Lenders Begin Compound Interest Refunds As Deadline Ends Today
The counters in the banking hall of a Punjab National Bank branch in New Delhi, India. (Photographer: Sondeep Shankar/Bloomberg New)

Lenders Begin Compound Interest Refunds As Deadline Ends Today

As the deadline to refund the compounded interest component of loans ends on Thursday, not all borrowers are likely to receive an update from their lenders as banks face operational hiccups.

The country’s largest lender State Bank of India was “mid-way” into the disbursal process and will complete it within the deadline, Dinesh Kumar Khara, chairman, said in a press conference on Wednesday in response to a question by BloombergQuint.

So far, the nation’s largest lender by assets has credited nearly Rs 650 crore to one crore loan accounts and has almost completed disbursals, according to CS Setty, managing director at SBI. The bank is yet to process refunds to those loan accounts that have either been closed or turned into saving accounts.

“We started the process of identifying eligible accounts earlier than the others, on Nov. 2 itself, as we have the largest number of loan accounts among all lenders,” he said. “Still, it took us full three days to complete disbursals.”

SBI identified the eligible accounts from credit bureau reports in batches and processed refunds to those loan accounts simultaneously over the past three days, streamlining the process. “Each bank has a different capacity to do that. The process of double-checking to ensure that those getting the benefit do not have outstanding loans of over Rs 2 crore is simple but time-consuming,” Setty said.

On Oct. 23, the government issued guidelines to banks for implementing a waiver of compound interest or interest-on-interest for a six-month period between March and August to specified loan accounts. The deadline for the refund is Nov. 5. To be eligible, a borrower’s loan account should be standard as on Feb. 29, with outstanding loans of up to Rs 2 crore. Lenders are required to auto-credit the difference between compound and simple interest to eligible loan accounts.

Identification of the total outstanding dues of a borrower is proving to be a challenge in some cases.

“The identification of eligible accounts that have outstanding borrowings of up to Rs 2 crore has been bit of a challenge. We are yet to receive that data from CIBIL (TransUnion CIBIL Ltd.) and that has caused some delay,” said PR Rajagopal, executive director at the Bank of India. “We have already started the process but are yet to credit the waivered amount to borrowers, which may take another day or two.”

An emailed query to public sector lender Punjab National bank remained unanswered.

Private lenders such as ICICI Bank Ltd. and Axis Bank Ltd., too, have begun disbursing compound interest to meet the government deadline, senior officials at these banks, who did not wish to be named, told BloombergQuint.

“While we cannot get into the details, as far as the directive and guidelines are concerned, the bank is compliant,” a spokesperson for HDFC Bank said in a response to BloombergQuint’s queries.

ICICI Bank and Axis Bank are yet to respond to emails sent on Thursday morning.

Federal Bank Ltd., too, has started the process and will complete all refunds by the Nov. 5 due date, Shalini Warrier, executive director, chief operating officer and business head-retail at the lender, said. The bank did not face any material issues in processing these refunds owing to its strong analytical and management information systems, Warrier said.

While banks have relatively stronger processes, smaller non-bank lenders may face a challenge in sending refunds to a large number of accounts.

They [NBFCs] are facing a lot of system glitches and bottlenecks in carrying out the high-volume of transactions, said Raman Aggarwal, area chair-NBFCs, Council for International Economic Understanding. “In some cases, the amounts are so small that the cost of transaction for the lender is higher than the refund amount to be credited, especially in the case of small retail loans.”

“While compliance has begun on a larger level, it may happen that all loan accounts will not get credited with the refund today [Thursday] itself because the systems of most NBFCs will not be able to handle such a large volume of transactions,” Aggarwal said.

As part of its guidelines, the government said it will bear the cost of the compound interest waiver scheme, estimated to be around Rs 6,500 crore, and asked lenders to submit their claims for reimbursement by Dec.15, 2020. These claims should be pre-audited by the statutory auditor of the lending institution.

SBI will act as the nodal agency for the government, both to receive and settle claims. Lenders have also been asked to set up a grievance redressal for the scheme.

“Once all claims are submitted to us, we will consolidate and submit them by December-end,” Setty said. “There is, however, no indication from the government yet on when these claims will be settled.”

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