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The union government has decided to waive “interest on interest” on loans upto Rs 2 crores for a period of six months, from March to August. This was informed by the govt in an affidavit filed with the Supreme Court on the matter.
The govt said in the affidavit that due to the unprecedented situation of the coronavirus pandemic, the only solution to give relief to the borrowers is for the government to bear the burden of waiving of interest. The govt said that it will seek the Parliament’s approval for the same.
This decision will benefit a large number of small borrowers, including those who have already repaid their loans during the period. As per the affidavit filed by the finance ministry, the compound interest on MSME loans, loans taken for education, housing, automobile, consumer durable goods, credit card dues, personal loans and consumption loans will be scrapped, and the loans will attract simple interest.
In March this year, the Reserve Bank of India had allowed the banks to extend a moratorium on loans for a period of three months. Later in June, the moratorium was extended for further three months upto 31st August. Therefore, borrowers were given the option of not paying EMIs from six months, from March to August.
But the moratorium meant that interests accumulate on this period, resulting in borrowers having to pay more than then original repayment schedule. Now removing the compounding of interests for the moratorium period will remove that requirement of increased payment.
This compound interest waiver will be applicable to all borrowers un the approved categories, regardless of whether the moratorium was availed or not. The ministry said that they decided to waive interest on interest only for certain categories, not all, because if interest on loans is waived, it will cost the banks Rs 6 lakh crores. “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 ministry said.
“The government, therefore, 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 ministry said. As a result, interest on loans only up to Rs 2 crore will be waived.
Earlier the govt and the RBI had refused to grant any waiver of interest because it will affect the banks. The new decision comes after recommendation of a panel headed by former Comptroller and Auditor General Rajiv Mehrishi. The govt reconsidered its position after the Supreme Court bench of Justices Ashok Bhushan, R S Reddy and M R Shah asked the govt to “consider and reconsider” its position to give relief to borrowers affected by the Coronavirus lockdown.