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Govt to pay interest on interest for sub- 2 cr loans, may hit pandemic services

RBI on 22 May had extended the moratorium on loans till 31 August as businesses ground to a halt amid the nationwide lockdown. (Photo: Mint)Premium
RBI on 22 May had extended the moratorium on loans till 31 August as businesses ground to a halt amid the nationwide lockdown. (Photo: Mint)

  • The finance ministry in an affidavit to the Supreme Court on Saturday said that if charges were waived for all categories of loans, it would lead to a 6 trillion burden for banks

NEW DELHI/MUMBAI: The government said on Saturday it will waive 'interest on interest' on loans of up to 2 crore for six months through to the end of August, but warned this will impact “pressing commitments" such as fighting the coronavirus pandemic.

The announcement, made in an affidavit to the Supreme Court, was welcomed by retailers and small businesses that have been the hardest hit by the pandemic. But it came twinned with a warning.

Bearing the cost of paying interest on interest, it told the court, 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."

It also said it did not waive the interest charged on all categories of loans because that would have made it difficult for banks to survive.

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" and that it will seek Parliament's approval for the decision.

The move includes those who have cleared their dues, and the compound interest will be scrapped 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.

To be sure, interest on the loan itself has not been waived.

The finance ministry said in the petition on Saturday that if charges were waived for all categories of loans, it would lead to a 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."

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 immediate impact of the waiver on government finances is not known.

The Reserve Bank of India (RBI) on 22 May extended the moratorium on loans till 31 August 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.

On 28 September, the apex court had adjourned the loan moratorium case till 5 October, granting more time to the Centre, the RBI and banks to work together and file a response on their stand on waiving interest charged during the moratorium period.

Petitioner Gajendra Sharma, a borrower from Agra, had submitted that no interest should be charged during the moratorium because people are facing "extreme hardship".

The move is set to benefit retail and small businesses with loans up to 2 crore, categories that bore the brunt of the pandemic.

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 court will hear the case next on Monday.

"This endeavour will be over and above the support of 3.7 trillion to MSMEs, 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 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.

A senior government official told Mint that there will be more clarity on Monday, after the Supreme Court hearing. “The implementation and the modalities of how the benefit of the waiver will be given to borrowers will be decided once the final judgment is out," the official said.

The official said the waiver may cost the government more than 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.

Analysts, however, say the cost to the exchequer will be about 5,000-7,000 crore.

According to a senior banker at a private sector bank, the idea to bear the burden is a welcome decision, given that most Indian banks are starved for capital and this would have further depleted resources.

"Responsibility of such welfare initiatives rests with the government and it is a good move to not force banks bear such costs. However, the modalities need to be worked out and only then will a clearer picture emerge," the banker said.

He cautioned that it will lead to a mammoth EMI recalculation exercise by banks that are already in the midst of a debt recast exercise.

That apart, it also needs to be seen how long it takes the government to reimburse the compound interest costs to banks. Typically, in the case of farm loan waivers, state governments take anywhere between a few months to a year to reimburse banks.

The pandemic has undoubtedly stretched the government’s finances, forcing it to borrow more than what was initially budgeted. The total amount raised so far this year has been 7.7 trillion or 82% higher than the corresponding period last year, Care Ratings said in a report on 25 September.

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