India Bears Deferred Loan-Interest Costs in Relief to Borrowers

(Bloomberg) -- The Indian government will reimburse lenders for some deferred interest on small loans, a move that will bring relief to millions of borrowers impacted by coronavirus pandemic.

The Department of Financial Services issued the guidelines to banks and other lenders after the country’s top court said it expected the government to outline the plan to waive deferred interest on loans to small borrowers.

The move comes after a group of borrowers approached the country’s top court seeking a waiver on compounded interest and an extension of the repayment holiday as banks had been imposing charges on both the principal and interest. The Reserve Bank of India gave borrowers a six-month freeze on their loan repayments, which ended on Aug. 31.

Under the plan, the government will reimburse lenders after they pay the difference between compound interest and simple interest for six months to August on loans of as much as 20 million rupees ($272,000) to eligible borrowers, according to a notification.

The waiver will lead to the government paying “interest on interest” on loans and will cost the government 65 billion rupees in payments, Solicitor General Tushar Mehta told the Supreme Court during a hearing earlier this month.

Loans taken by small companies and students, and for housing, automobiles and for consumer borrowings will be eligible for the benefit, according to the notification.

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