InvestorQ : Why banks will have to be careful about granting interesting waivers during COVID-19?
Anjana Aiyar made post

Why banks will have to be careful about granting interesting waivers during COVID-19?

Answer
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Arya Nanda answered.
3 months ago


There are two reasons why interest waivers may be unhealthy for the Indian banking system. Let us look at the two risks separately.

· First is the risk of moral hazard and here is what it means. Interest waivers could induce borrowers to binge on debt in the hope that eventually government would intervene and bail them out of a financial mess. The EMI moratorium is expected to spike the gross NPAs of the banking system from 9% to 14%. Interest waivers could create the wrong impression in borrowers that it is OK to borrow and default.

· Interest waivers are also unfair to depositors reeling under cuts in deposit rates. Firstly, the interest waiver protects the interests of borrowers at the cost of the interests of depositors. It must be recollected that it is the depositors that form the backbone of banks. Secondly, banks need to continue to service deposits and pay interest but received nothing on the loans given out of the deposits. Therefore, it makes their balance sheets vulnerable and could also impact the solvency of the bank / lender!