Centre in favour to waive ‘interest on interest’ on loans up to Rs 2 crore during Moratorium period

By admin | Oct 20, 2020

The central government has filed an affidavit in the Supreme Court in support of waiving compound interest or ‘interest on interest’ for small ticket loans of up to Rs 2 crore. If passed, this scheme will provide relief to small borrowers that will help them with the compound interest collected during the six month moratorium period. However, the government is yet to make a distinction, if any, as to who can avail this scheme - borrowers who may have continued to pay their dues and those who may have availed of the moratorium partially or fully. 

 

The government is proposing waiving of interest on interest for the following categories:

 

  • 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 

 

While the specifics of the implementation and people who can avail this scheme remain to be outlined, in the affidavit the government intends to continue the tradition of handholding for small borrowers. According to Anil Gupta, Head-Financing Sector Ratings ICRA, “ For those who have not availed the moratorium, a notional amount of the compound interest for a six-month period can be reduced from the outstanding balance in the loan account.” Irrespective of the borrowers availing the moratorium or not, and assuming that not more than 30-40% of the overall loans are from banks and NBFCs eligible for relief, Mr Gupta says that the cost to the government should not exceed beyond Rs 5,000- 7,000 crore.  

 

In the affidavit, the government specified that lenders would not be expected to bear the burden and the cost of the waiver. In fact, the cost of the waiver will be borne by the government without passing on the financial impact to the depositors or affecting their net worth adversely.  While the cost of such a large waiver has not been specified by the government, they are confident to seek due authorisation from the Parliament for making appropriate grants in this regard. 

 

The waiver of compound interest would provide relief to many borrowers who are facing financial difficulties due to the Coronavirus pandemic. At the same time, this move will also protect the banks’ balance sheet from any impact from the compound interest waiver. However, the timing and mode of payment of interest to banks by the government will have an impact on banks' finances. Further, what happens to an account which has since been closed or the loan fully repaid, remains to be seen.

 

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