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Govt to bear interest on interest for small borrowers during moratorium

Any individual whose loan amount is less than Rs 2 crore will be eligible for waiver of the compounding of interest.

Banking system | financial services | Finance Ministry

Somesh Jha  |  New Delhi 

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The government is ready to bear the burden of an interest waiver for small borrowers as the estimated impact of the move on the entire would otherwise be Rs 6 trillion, the ministry told the on Friday.

“After careful consideration and weighing all possible options, the Union government has decided to continue the tradition of handholding the small borrowers. The government, therefore, has decided that the relief on waiver of compound interest during the six-month moratorium period shall be limited to the most vulnerable category of borrowers,” an affidavit submitted by the department of (ministry) on Friday stated.

Any individual or entity whose loan amount is less than Rs 2 crore, irrespective of whether they have availed loan repayment moratorium or not, will be eligible for waiver of the compounding of interest. This includes micro small and medium enterprises, education, housing, consumer durable, credit card, automobile, personal, and consumption loans.

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While the government didn’t spell out the financial implication of the move, it said that it will have to seek Parliament's approval for making appropriate grants towards waiver of compound interest for small borrowers.

The government was responding to a Agra resident Gajendra Sharma's plea in the that demanded a waiver of interest charged by on the instalments that have been deferred for repayment by the of India (RBI) through a six-month moratorium imposed in March. A number of industrial bodies have joined the cause with the original petition demanding waiver of interest, or waiver of interest on interest on the suspended monthly instalments during moratorium period.

“If the government were to consider waiving interest on all the loan and advances to all classes and categories of borrowers corresponding to the six-month period for which the moratorium (i.e. deferment of payment of instalment) was made available under the relevant RBI circulars, the estimated amount is more than Rs 6 trillion,” the government submitted.

To illustrate, the government told the apex court that a waiver for all types of borrowers by the State Bank of India, the country’s largest bank, would “completely wipe out over half of bank’s net worth which has accumulated over nearly 65 years of its existence.”

The government made it clear that it would be “impossible” for to bear this burden of interest waiver as it would render most of the unviable and would raise a “very serious question mark over their very survival.” “This was one of the main reasons why waiver of interest was not even contemplated and only payment of instalments was deferred,” the government said, emphasizing that the RBI made it clear in its March circular on moratorium that interest payment would only be deferred and not waived.

ALSO READ: Life after moratorium, for banks and borrowers

The government said charging compounding interest helps run the It told the court that banks lend money on deposits they receive from depositors, who are more in number than the borrowers. “It is estimated that in the Indian for every ‘loan account’ there are about 8.5 ‘deposit accounts.’ Banks can pay interest to depositors only because borrowers pay interest to the bank, it explained. “This transaction of depositors or banks or borrowers is inevitably a part of a chain that can never be permitted to be broken,” it said.

The pleas filed in the apex court have raised issue pertaining to validity of March 27 circular of the RBI which allowed lending institutions to grant moratorium on payment of instalments of term loans falling due between March 1, 2020 and May 31 this year due to the pandemic. Later, the period of moratorium was extended till August 31.

The government had in September set up a three-member expert committee led by former Comptroller and Auditor General of India (CAG) Rajiv Mehrishi to gauge the impact of waiving interest on loans for borrowers during the six-month moratorium period that was in place to deal with COVID-19 pandemic.

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First Published: Sat, October 03 2020. 12:21 IST