The Government of India has told the Supreme Court that it will waive off compound interest on loans of up to Rs 2 crore from the six-month moratorium period. This comes as a huge relief to many who availed the moratorium on term loans between March-August 2020 and were worried about paying the accrued interest on instalments of these six months.
In an affidavit filed with the SC, the government said that it has decided to bear the burden of the compound interest waiver for MSME (Medium, Small and Micro Enterprises) loans and personal loans of up to Rs 2 crore.
These include MSME loans, education loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professionals and consumption loans, all up to Rs 2 crore.
“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 Union government said.
In March, the Reserve Bank of India allowed banks to offer a moratorium on all loans, including credit card payments, to reduce the financial impact of the COVID-19 pandemic on borrowers. However, the moratorium was only a deferment of EMIs, and borrowers would not only have to pay it back after the moratorium period but were being charged interest on the deferred interest repayments.
The bench comprising Justices Ashok Bhushan, R. Subhash Reddy and M.R. Shah was hearing a plea filed by Agra resident Gajendra Sharma, who wanted the interest on EMIs to be waived off. While hearing the matter, the SC asked the Union government to consider a plea for not charging interest and interest on deferred EMIs during the moratorium period, and also not downgrade the credit and asset classification of the borrowers. There were other pleas as well, seeking the extension of the moratorium.
Following this, the Union government constituted an expert panel under the chairmanship of former Comptroller and Auditor General (CAG) Rajiv Mehrishi to assess the relief required by borrowers on loans taken during moratorium.
However, the RBI has maintained that the moratorium was only a temporary solution to offer relief to borrowers affected by the pandemic, and that a longer moratorium can impact credit behaviour of borrowers and increase the risks of lapses in payments once they’re due.
The government, in the affidavit, also said that it is impossible for banks to bear the burden that would result from waiving off the compounded interest and that it would ‘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 on their very survival’.
The affidavit added that the government bearing the burden would "naturally have an impact on several other pressing commitments being faced by the nation, including meeting direct costs associated with pandemic management".
“The only solution, under the circumstances, is that the Government bear the burden resulting from waiver of compound interest. This Hon’ble Court would be satisfied that the Government bearing this burden would naturally have an impact on several other pressing commitments being faced by the nation, including meeting direct costs associated with pandemic management, addressing basic needs of the common man and mitigating the common man's problems arising out of loss of livelihood,” the Union government stated in its affidavit.