CB caps interest rates on leases provided for public transport buses during moratorium period

• Move aimed at supporting pandemic affected biz and self-employed individuals 
• Banks raise concern on interest cost relating to customer deposits and other borrowing liabilities

In a bid to provide further relief to the pandemic affected businesses and self-employed individuals, the Central Bank has decided to cap the interest rate chargeable on leases already provided for buses providing public transport at 4 percent, applicable for the moratorium period and payable over a prolonged time. 

The Central Bank has informed the licensed banks of the capped interest rate on such leases and has instructed, “to recover such amounts in equal installments over a 2-year period or during the remaining tenure of the leasing facility, commencing from 01 October 2020”. 

In a circular issued on March 24 to provide relief to assist the pandemic affected businesses and individuals, the Central Bank directed all financial institutions to offer a 6-month moratorium on leasing rentals of buses operated by self-employed, among a host of other categories of leases and loans to businesses, self-employed and salaried people. 

However, the banks have raised legitimate concerns on the interest cost relating to customer deposits and other borrowing liabilities, which they continue to have to pay despite them having to forgo income on part of their loans enjoying the moratorium, creating an imbalance between incomes and expenses relating to the interest. 

Since the moratorium is granted for the total installment, the borrower is not required to service the interest and the capital until the end of moratorium period. However once the moratorium period ends, customers will have to start making payments as agreed before concessions were offered, the Central Bank said in an explanatory note for the benefit of the borrower. 

The banks were then allowed to charge up to a maximum of 7 percent as additional interest on the deferred installments of term loans, which become eligible for the moratorium in relation to equated monthly installment loans granted in rupees. 

However, such interest applicable for the moratorium period is only recoverable at the end of the remaining tenor of the loans, and not immediately after the end of the moratorium period. 
The latest concession on leases came as the private sector bus industry is facing financial hardships due to nearly two months of  lockdowns where mobility and people movement was completely forbidden.    

Even after the easing of the lockdowns since mid-May, their ability to make incomes similar to the pre-pandemic levels could be limited to restrictions on the maximum number of passengers that they could carry while the people avoid public transport due to fears of catching the virus. 

Meanwhile, there is also a segment of people who continue to work from home, who otherwise might hop in to a bus for their daily commute. 

All these factors could be weighing on the viability of the industry, which has long been on the decline even before the pandemic hit.  

In extending the relief to other industries worst affected by the pandemic, the Central Bank recently decided to extend the existing 6-month moratorium period on leases on tourism related vehicles to 12 months. It also requested the banks and finance companies to wave off the accrued penal interest in respect of such vehicle leases. 

However, the borrower should service the interest during the moratorium period and financial institutions were requested to recover such interest in a manner that is not inconvenient to the borrower.