In today's Finshots brief, we will discuss
- The government's decision regarding 'interest on interest'
- The future of multiplex theatres and
- Changi Airport's future outlook
The interest on interest conundrum
Coronavirus has thrown the finances of millions of individuals and businesses into disarray- leaving them with tons of debt and an inability to repay it.
By the end of March, the Reserve Bank of India decided something had to be done. So they allowed banks to grant a moratorium on the payment of loan installments due between March 1 and May 31. The scheme was later extended till Aug. 31.
A moratorium technically means the suspension of some activity during a defined period. However, the RBI didn’t actually suspend anything here- they simply requested banks to let people postpone their loans and interest payments for a few months. This wasn’t a waiver. Borrowers weren't supposed to be given any discounts. They were expected to pay the principal amount and interest accrued during the period in full.
And for people struggling with cash flow issues during the lockdown period, this was a boon. Salaried workers and small business owners who were out of other options readily opted for the scheme. But despite this, the percentage of people who availed it wasn’t as high as expected. This wasn’t because of any sudden recovery in the financial position of borrowers. Stress and uncertainty levels were as high as before. So one possible explanation for the low demand is that borrowers figured out that they would be required to pay interest on interest during the period.
You see, when you repay your loan in monthly instalments, you have to pay back a part of the principal amount every month along with some interest. And if you defer your EMI, the unpaid interest gets added to your principal amount- leading to an even higher interest in the next month. And on it goes until you pay up. This is what compounding is all about.
But borrowers under stress didn’t want to pay this extra money. In fact, they didn’t even want to pay the interest in the first place. And so, there was persistent demand for a waiver on both.
But the RBI vehemently opposed this. They contended that any waiver on interest, or interest on interest would adversely impact the financial health of the lenders by exposing them to a collective loss of a whopping ₹2 trillion. In turn, this would affect current depositors, future borrowers, and the entire banking ecosystem.
But after a businessman moved the supreme court on the issue, the government was forced to set up a committee to measure the impact of waiving off the interest. And the court gave the government until October 5th to come up with a plan.
And now, they have. On Friday, the government decided to waive interest on interest for loans of upto Rs. 2 Crores for six months through August. The compound interest (on interest) for loans taken out for education, housing, credit-card dues, among others will now be borne by the government. Ideally this ought to benefit thousands of small borrowers, including the ones who have already cleared their dues. Isn’t that something?
The curtain rises once more
When the pandemic made landfall, it was a prolonged intermission for cinema halls across India. Even after other restrictions were gradually eased, multiplexes continued to remain shut. But now, the curtain is set to rise again- the Ministry of Home Affairs is allowing multiplex theatres to reopen at 50% capacity from October 15th.
Of course, investors are overjoyed, leading to a 12-18% rise in the shares of PVR and Inox over the week.
But even though the news is encouraging, cinema halls will have to deal with a lot of changes and unexpected variables.
For one- the theatrical window. That is, the time duration during which a movie plays exclusively in theatres, before being released on DVD or digital media. The pandemic, coupled with the rising popularity of OTT platforms has caused this window to shrink drastically. And this is obviously bad for theatres because part of the appeal about a movie is the exclusivity and the hype. If new releases make their way to streaming sites faster, people will have fewer incentives to visit the theatres.
Also, occupancy rates are going to be lower in the next few months as people continue trying to protect themselves from the virus. So, all in all, it just may be a while before things look up for theatres.
Daunting times ahead
As the coronavirus decimates the demand for long-distance travel, a third of the world’s 26,000 passenger jets remain grounded. According to the International Air Transport Association, this puts some 25 million jobs in airlines, travel and tourism at risk.
Even the world’s best airport must face the music. For the fiscal year ended March, passenger traffic at the Changi Airport (Singapore) dropped for the first time in over 10 years. In a bid to save cash, Changi instituted salary cuts of upto 30% for management and staff, and decided to stop dividend payouts during the year. They’ve also postponed the construction of their fifth terminal, facilitated more cargo flights, and converted parts of its premises to isolation facilities.
Despite these measures, airport officials have warned that the effects of the pandemic are not going away anytime soon. According to its annual report, “The battle with Covid-19 has only just begun. The future does appear daunting with the situation showing no signs of abatement.”
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-Written by Vedika Agarwal