Central Government agrees to waive interest on interest during moratorium period
In a big relief for Individual and MSME borrowers, the Centre on Friday informed the Supreme Court that it has decided to waive "interest on interest" on loans of up to Rs. 2 crore during the six-month repayment moratorium with the benefit also available to those who were clearing their dues on a range of loans between March and August. In its affidavit, the finance ministry said the government has decided to maintain its tradition of handholding small borrowers and bear the burden arising from such waiver of interest on interest, or compound interest, for the banks.
"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, educational loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professionals and consumption loans", the ministry said.
The Centre said waiving of interest on interest for all categories of borrowers would result in a very substantial and significant financial burden on several categories of banks, which would find it impossible to withstand the financial burden. As this would also impact the depositor's interest, the government decided not to waive it for big borrowers. "The government, therefore, 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 ministry said.
If the government were to consider waiver of interest on all types of loan advances to all categories of borrowers corresponding to the six-month period for which the moratorium, that is the deferment of payment of instalments, was made available under the relevant RBI circulars, the estimated amount waived would be more than Rs. 6 Lakhs crore," the ministry said.
It said that if the banks were to bear the burden, a substantial part of their net worth would be wiped out, rendering most banks unviable. "This was one of the reasons why waiver of interest was not even contemplated and only payment of instalments were deferred," it said. Over half of the State Bank of India's net worth would be wiped out if interest was waived for six months, the government said.
