Modi govt ready to waive compound interest on loans up to Rs 2 crore during moratorium

The Union government told the Supreme Court that it has taken a decision to waive off "interest on interest" on loan up to Rs 2 crore during the six-month moratorium announced due to the Covid-19 pandemic.

It also informed the court that more than 50 per cent of borrowers have not availed the moratorium, and if waiving interest on all loans and advances is considered then it would have to forego excess of Rs 6 lakh crore.

In a major relief for thousands of individuals and MSME borrowers, the Centre, in an affidavit, said that the only solution is that it should bear the burden resulting from waiver of compound interest.

“After careful consideration and weighing all possible options, the Union government has decided to continue the tradition of handholding the small borrowers”, the Centre said.

The categories of loans up to Rs 2 crore to be provided relief included MSME loans, education loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professional and consumption loans.

The Centre also maintained that it was impossible for banks to bear the burden resulting from waiver of compound interest without passing on the financial impact to the depositors or affecting their net worth adversely, which would not be in the larger public interest.

“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,” the affidavit by a senior officer from the Finance Ministry stated.

The government changed its stand on recommendations of an expert committee. Earlier, the RBI and Centre had said the waiver of interest on interest would be going against other stakeholders, especially depositors, who have paid their dues.

A bench of Justices Ashok Bhushan, R Subhash Reddy, and M R Shah, which asked the Centre to reconsider its decision, would take up a batch of petitions by Gajendra Sharma and others on October 5.

The Centre also pointed out if banks were to bear this burden of interest on all categories of loan, then it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark over their survival.