In a huge relief for borrowers, the government has told the Supreme Court that it is ready to waive compound interest on personal and small loans of up to Rs 2 crore, frozen by the Reserve Bank of India (RBI) in a six-month moratorium granted because of the coronavirus pandemic. The interest waiver will apply for loans taken by the "most vulnerable class of borrowers" that includes MSMEs (Micro, Small and Medium Enterprises), for educational, housing, consumer goods and auto loans and for credit card dues.
"Under pandemic conditions, the only solution is for the government to bear the burden of waiving of interest," the government has said in an affidavit submitted on Friday, adding that it will seek parliament's permission for grants to enable the move.
For the categories specified by the government, the waiver on interest will be irrespective of whether the borrower has availed of the moratorium.
However, the finance ministry says waiving off interest on loans to every category would amount to a burden of Rs 6 lakh crore 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," it says. This number may be between Rs 10,000 crore-Rs 15,000 crore if the facility is extended to all borrowers. Bankers see the Centre compensating the interest waiver as a social welfare measure.
The burden of waiver of compounded interest for a specific class of borrowers would be borne by the government as the only viable solution, the affidavit says. It is added that it is impossible for the banks to bear this burden without passing on the financial implications on to their depositors or affecting their net worth, neither of which is in larger public interest.
The Reserve Bank of India had allowed borrowers to seek a six-month moratorium on loans but banks and housing finance companies were imposing charges on both the principal and the interest, which translated into the repayment period being extended by more than six months.
At the same time, how this benefit would flow to those who were paying their EMIs or credit card dues during the moratorium period is yet to be clear. The Supreme Court is scheduled to hear the case next on Monday.
The Centre said the decision was taken in the interest of borrowers and the banks, which would unable to sustain this load. It had initially opposed the waiver in the court. The proposal was also opposed by the Indian Banks Association (IBA) and the State Bank of India separately represented in the matter.
The court on September 10 asked the Centre to consider the issue taking all parameters into consideration. Earlier, with the moratorium ending on August 31, the court had said that banks will not declare loan accounts as non-performing assets (NPA) on account of non-payment.