Kerala Bank set to charge compound interest on defaulted non-farm loans

Secretary dismisses Cabinet file on regularising 1,856 Kerala Bank employees

Kozhikode: Loan beneficiaries are crying foul over the Kerala State Cooperative Bank’s decision to charge compound interest on non-agricultural loans.

The Board of Management of Kerala Bank has approved charging compound interest. With this decision, the interest would have to be calculated on a monthly basis.

Failure in timely repayment would lead to the re-calculation of interest, by adding the defaulted interest to the principal loan amount.

The bank authorities explained that the decision was based on a Reserve Bank of India directive on non-agricultural loans. The bank said the move was to establishing a uniform compound interest rate post the merger of district cooperative banks which led to the creation of the Kerala Bank.

“This is not a new system. The Reserve Bank had in 2014 directed to charge compound interest on non-agricultural loans. When the Kerala Bank completed the merger (of district cooperative banks) it went for a uniform interest rate. This is beneficial for those who repay the loan on time,” reasoned P S Rajan, CEO, Kerala Bank.

Move against cooperative policy

Experts in the cooperative sector, however, pointed out that the Kerala Bank’s decision would place an additional burden on customers in the time of the COVID-19 pandemic. The move came even as many have defaulted on repayment due to the pandemic.

It has also been alleged that the bank, established as Kerala’s own to protect people from being exploited by commercial financial institutions, is now fleecing its customers. The bank’s move was in breach of the State’s cooperative policy, they said.

Though the bank has been charging compound interest on cash credits to businesses, it was not applied on commoners availing loan.

The bank’s decision would be a setback for the bedridden, who doesn’t have repayment capabilities. It would also deny them a relaxation in interest, usually granted in adalats.

How it may work out

Consider that one person has availed a loan of Rs 5 lakh at an interest of 12%. He would have to repay Rs 8,000 that includes Rs 5,000 of the principal amount, and Rs 3,000 in interest.

Currently, if he defaults one instalment, he would have to pay 2% of the principal amount more as penal interest. With the new decision, the penal interest would be 12% compound interest of the original interest of Rs 3,000. So, if one had to pay, including penal interest, Rs 8008.33 earlier, the new interest regime would require him to pay a monthly instalment of Rs 8038.33.

Recent Supreme Court order on compound interest

Following a Supreme Court order, the central government had recently refunded the interest on interest to all borrowers of loans below Rs 2 crore as a relief for people hit hard by lockdowns. The judicial intervention pertained to the interest on interest on the loan amount for all borrowers who were granted moratorium between March and August 2020 in the wake of the initial phase of the lockdown that was announced with the outbreak of the COVID-19 early last year.

However, the Supreme Court said the interest cannot be waived off completely and also decided against the extension of the moratorium announced by the Reserve Bank of India beyond six months.

It has to be seen how the loan defaulters in Kerala would be hit by the latest move of the leading cooperative bank.

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