The union government on Saturday agreed to waive ‘interest on interest’ on loans up to Rs.2 crore for six months till the end of August, but warned that this will impact “pressing commitments” such as fighting the coronavirus pandemic.
To be sure, interest on the loan itself has not been waived. According to analysts, the decision to waive “interest on interest” is expected to cost Rs.5,000-Rs.7,000 crore to the state exchequer. However some officials maintain that the waiver may cost the government over Rs.20,000 crore, mainly due to the presence of large categories of lenders, including private and public sector banks, non-bank financiers, small finance banks, among others. The case is has been posted fir further hearing on Monday.
The Government shown willingness to waive the “interest on interest”, in an affidavit filed in response to a petition by a borrower from Agra, Gajendra Sharma, who had demanded that no interest should be charged during the moratorium because people are facing “extreme hardship”.
In its affidavit, the government said that due to unprecedented conditions “the only solution is for the government to bear the burden of waiving of interest. The finance ministry will have to seek the Parliament’s approval in the winter session for additional funds to support the waiver of the compounding interest.
The move includes waiver of the compound interest for eight sectors: micro, small and medium enterprises (MSMEs), education loans, housing, consumer durables, credit card dues, auto loans, personal and professional loans and consumption loans.
The Government said that if charges were waived for all categories of loans, it would lead to a Rs.6 trillion burden for banks. If the banks were to bear this burden, it would necessarily wipe out a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark on their survival.
While the final decision rests with the Supreme Court, the government’s move to bear the burden will also include borrowers who have not availed of the moratorium. That said, bankers pointed out that the waiver will apply to those who have not availed of the moratorium and have defaulted on repayments during the six months of April-September.
The Reserve Bank of India (RBI) on May 22 extended the moratorium on loans till August 31 as businesses ground to a halt amid the nationwide lockdown. Back in March, it had allowed a three-month moratorium from paying EMIs and on payment of all term loans due between 1 March and 31 May,2020.
“This endeavour will be over and above the support of Rs.3.7 trillion to MSMEs, Rs.70,000 crore for home loans, etc. already exerted through the “Garib Kalyan” and “Aatma Nirbhar” packages announced by the government earlier,” the government said in the affidavit.
Last month, Parliament approved a Rs.20,000 crore infusion into public sector banks via government securities as the covid-19 crisis put borrowers under pressure, increasing the threat of higher non-performing assets.