Government For Waiving ‘Interest On Interest’ On Loans Up To Rs 2 Crore During Moratorium Period
A customer withdraws a stack of rupee notes at a bank branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Government For Waiving ‘Interest On Interest’ On Loans Up To Rs 2 Crore During Moratorium Period

The central government, in an affidavit filed in the Supreme Court, has supported waiving compound interest or ‘interest on interest’ for small ticket loans up to Rs 2 crore. The relief would be available to all borrowers, the government said in the affidavit but did not specify the manner in which relief would be provided to those who may not have availed the moratorium.

The response came in the matter of Gajendra Sharma vs. Union of India being argued in the apex court.

In its affidavit, the government said that it 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. This category of borrowers, in whose case, the compounding of interest will be waived, will be MSME loans and personal loans up to Rs 2 crore.”

The government, in its affidavit, does not make a distinction between borrowers who may have continued paying their dues and those who may have availed of the moratorium partially or fully. “The relief to all borrowers in respect of compounding of interest during the period of the moratorium would be admissible to the categories specified hereinafter irrespective of whether the borrower had availed of the moratorium or not,” it said.

The government is proposing that interest on interest for loans in the following category be waived:

  • MSME loans up to Rs 2 crore
  • Education loans up to Rs 2 crore
  • Housing loans up to Rs 2 crore
  • Consumer durable loans up to Rs 2 crore
  • Credit card dues up to Rs 2 crore
  • Auto loans up to Rs 2 crore
  • Personal loans to professionals up to Rs 2 crore
  • Consumption loans up to Rs 2 crore

In case the government wants to give the same relief to a borrower who has not availed the moratorium, a notional amount of compound interest for a six-month period can be reduced from the outstanding balance in the loan account, said Anil Gupta, head-financial sector ratings at ICRA.

Assuming not more than 30-40% of the overall loans of the banks and NBFCs will be eligible for relief, the cost to the government should not exceed Rs 5,000-7,000 crore, said Gupta. This is assuming all borrowers are given relief irrespective of they availing the moratorium or not, he said.

The government, in its affidavit, specified that lenders would not be expected to bear this burden and the cost of the waiver would be borne by the government.

“It is submitted that it is 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 national economic interest.”

The affidavit added that the only solution is for the government bear the burden resulting from waiver of compound interest. The government did not specify the exact cost it would incur on account of such a waiver. “Government will seek due authorisation from Parliament for making the appropriate grants in this regard,” the affidavit states.

“The government believes that help to small retail and SME borrowers is essential as they are a strong pillar of the economy. So while concerns around the eventual impact on customer behaviour are valid, the government would see this is as essential support to small borrowers,” said Pratip Chaudhuri, former chairman of State Bank of India. “The government also has to support banks in this situation because compounded interest is a part of their business. A bank can only pay compounded interest on deposits, if it receives compounded interest on loans. This is a balanced decision to help both segments,” Chaudhuri said.

The waiver of compound interest would provide relief to borrowers who were facing financial difficulties due to the Covid-19 pandemic, and at the same time protect banks' balance sheet from any impact due to such small borrowers, said Devendra Pant, chief economist at India Ratings & Research. However, the timing and mode of payment of interest to banks by the government will have an impact on banks' finances, he said.

No Scope For Broader Interest Waiver

The government in its affidavit also explained that there is no scope for a broader waiver of interest on all loans.

“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 was made available under the relevant RBI circulars, the estimated amount is Rs 6 lakh crore,” the affidavit said.

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