The government said on Saturday it will waive ‘interest on interest’ on loans of up to Rs 2 crore for six months through to the end of August, but warned this will impact “pressing commitments” such as fighting the coronavirus pandemic.
The announcement, made in an affidavit to the Supreme Court, was welcomed by retailers and small businesses that have been the hardest hit by the pandemic. But it came twinned with a warning.
Bearing the cost of paying interest on interest, it told the court, would “naturally have an impact on several other pressing commitments being faced by the nation, including meeting direct costs associated with pandemic management, addressing basic needs of the common man and mitigating the common man’s problems arising out of loss of livelihood.” It also said it did not waive the interest charged on all categories of loans because that would have made it difficult for banks to survive.
In its affidavit, the government said that due to unprecedented conditions “the only solution is for the government to bear the burden of waiving of interest” and that it will seek the approval of Parliament.
The move includes those who have cleared their dues, and the compound interest will be scrapped for eight sectors: micro, small and medium enterprises (MSMEs), education loans, housing, consumer durables, credit card dues, auto loans, personal and professional loans and consumption loans.
To be sure, interest on the loan itself has not been waived.
The finance ministry said in the petition on Saturday that if charges were waived for all categories of loans, it would lead to a Rs 6 trillion burden for banks. “If the banks were to bear this burden, it would necessarily wipe out a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark on their survival.”
The finance ministry will have to seek the Parliament’s approval in the winter session for additional funds to support the waiver of the compounding interest. The immediate impact of the waiver on government finances is not known.
The Reserve Bank of India (RBI) on 22 May extended the moratorium on loans till 31 August as businesses ground to a halt amid the nationwide lockdown. Back in March, it had allowed a three-month moratorium from paying EMIs and on payment of all term loans due between 1 March and 31 May.
On 28 September, the apex court adjourned the loan moratorium case till 5 October, granting more time to the Centre, the RBI and banks to work together and file a response on their stand on waiving interest charged during the moratorium period.
Petitioner Gajendra Sharma, a borrower from Agra, had submitted that no interest should be charged during the moratorium because people are facing “extreme hardship”.
The move is set to benefit retail and small businesses with loans up to Rs 2 crore, categories that bore the brunt of the pandemic.
While the final decision rests with the Supreme Court, the government’s move to bear the burden will also include borrowers who have not availed of the moratorium. That said, bankers pointed out that the waiver will apply to those who have not availed of the moratorium and have defaulted on repayments during the six months of April-September.