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October 3, 2020

Loan Moratorium: Government agrees to waive compounded interest for loans of up to Rs 2 crore

by facelesscompliance in Income Tax

Loan Moratorium: Government agrees to waive compounded interest for loans of up to Rs 2 crore

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 specific the manner in which relief would be provided to those who may not have availed the moratorium.

The case relating to interest on loans under moratorium, being heard in the Supreme Court now, has serious implications for the banking sector in particular and the financial stability of the economy in general.

Bringing huge relief to individual and MSME borrowers, Centre told the Supreme Court that it would waive interest on the repayment of loans of up to Rs 2 crore.

The move will provide relief to individual borrowers and medium, small and micro enterprises (MSMEs) during the COVID-19 outbreak.

The compounded interest will be waived off for the “most vulnerable class of borrowers”. These loans include MSME loans, education loans, housing loans, and personal loans, among others, up to the amount of Rs 2 crore.

The Centre has reiterated that waiver of all interest on borrowings for the period of moratorium is neither agreeable nor practical, since this would burden the banks with an estimated amount of Rs. 6 lakh crore. The affidavit says

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”

“The only solution, is that government bear the burden resulting from waiver if 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 and mitigating the common man’s problems arising out of loss of livelihood.”

On the issue of downgrading of credit rating – a concern that was raised by several petitioners during the course of the hearing before the Court – the Centre has said that while a circular on this issue was issued by the SEBI earlier, in case follow-up decisions need to be taken, the government will engage with the SEBI to take a humane and holistic approach.

The RBI had granted borrowers a six-month freeze on their loan repayments — given the economic impact of the virus shutdown — which ended on August 31. The centre and the RBI had earlier told the court that the moratorium can be extended by up to two years.

The government’s decision marks a change from its earlier decision to say no to any interest waiver as it would affect banks. The change of stance is based on the recommendation of a government panel headed by former Comptroller and Auditor General Rajiv Mehrishi, which was tasked with examining the effects of the coronavirus and the lockdown on various sectors.

Banks raise money from depositors and shareholders. Interest waiver would be at their expense. This will seriously erode the confidence of depositors and shareholders. Already interest on bank FDs have fallen below the inflation rate. Negative real returns will drive depositors away from bank deposits. Therefore, waiver of interest on loans should not be attempted at all. A possible way out is the waiver of interest on interest with the government footing the bill. But, this will worsen the already stressed fiscal deficit.

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