The government has told the Supreme Court it has decided to waive "interest on interest" on loans of up to Rs 2 crore during the six-month moratorium period, the Times of India reported on Saturday.
The government's decision will benefit those clearing their dues on a variety of loans between March and August. "This category of borrowers, in whose case the compound interest will be waived, would be MSME loans and personal loans up to Rs 2 crore of the following category—MSME loans, education loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professionals and consumptions loans,” said the finance ministry in an affidavit before the Supreme Court on Friday, according to Times of India.
The Reserve Bank of India had allowed borrowers to seek a six-month moratorium on all loans due to the economic impact of the coronavirus crisis, but banks and finance companies charged interest on the entire amount: the interest as well as the interest liability.
"Under pandemic conditions, the only solution is for the government to bear the burden of waiving of interest," the government said in the affidavit, adding that it will seek Parliament's permission for grants to enable the move, according to NDTV.
"The government bearing this burden would naturally have an impact on several other pressing commitments being faced by the nation, including meeting direct cost associated with pandemic management," the affidavit added.
It did not estimate the impact on the banking sector from the move but said if it were to consider a complete waiver of interest payments over a six-month period, as some had sought, it would cost the sector Rs 6 trillion ($82 billion), according to Reuters.
Agra optician Gajendra Sharma, in a plea before the Supreme Court, has demanded the waiver of interest charged by banks on the instalments deferred for repayment by the Reserve Bank of India through moratorium. Industry associations have joined the cause with the original petition, demanding the waiver of interest, or waiver of interest on interest, on the suspended monthly instalments.
A government-appointed committee has given its recommendations on the impact of waiving interest and interest on interest on the national economy and financial stability. The Indian Banks’ Association (IBA) told the committee that instead of a waiver, it may ask the government to provide relief to borrowers.
Sharma applauded the decision. "I am happy millions of people won today," he told Reuters.
Supreme Court will resume hearing the case on Monday.
(With inputs from Reuters.)