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Home / News / India /  Interest on interest waiver: Small businesses, retail borrowers to benefit

MUMBAI: Retail borrowers and small businesses, perhaps among the worst hit by the coronavirus pandemic, will benefit the most from the government’s decision to waive off "interest on interest" charges on loans up to 2 crore for six months through August.

The benefit will be extended for loans availed by 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 has informed the Supreme Court.

While the final decision rests with the Supreme Court, the government’s plan to bear the burden will also encompass borrowers who did not avail of the deferment benefit.

The Reserve Bank of India (RBI) had on 22 May extended moratorium on term loans till 31 August amid the nationwide lockdown due to covid-19. In March, it had allowed a three-month moratorium from paying EMIs and payment of all term loans due between 1 March and 31 May.

That said, bankers have pointed out that unless a borrower has not availed of the moratorium but defaulted during the six months of April-September, there is no compounded interest applicable.

The top court will hear the case on 5 October.

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 impact of the move on government finances was not immediately known.

"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 an affidavit to the Supreme Court.

Last month, the Parliament had approved 20,000 crore infusion into public sector banks (PSBs) via government securities as the covid-19 crisis put borrowers under pressure, increasing the threat of a rise in non-performing assets.

A senior government official told Mint that there will be more clarity on Monday after the Supreme Court hears the matter.

“Right now, this is what the finance ministry has proposed (as mentioned in the affidavit). 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.

According to a senior official 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 added that it will lead to a mammoth equated monthly instalment (EMI) recalculation exercise by banks, 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 cost to banks. Typically, in the case of farm loan waivers, state governments take six months to a year to reimburse banks.

The apex court is hearing a petition pertaining to the issue of whether interest should continue to accrue on loans under moratorium.

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

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