Monthly Archives: March 2021

Compound interest exemption for all borrowers to cost government 7,000-7,500 cr

Compound interest

Mumbai: Supreme Court decision to allow compound interest exemption for all borrowers between March and August, regardless of loan size, will cost government another ??7,000-7,500 crores.

“According to our estimates, the compound interest for a six-month moratorium for all lenders is estimated at ??13,500-14,000 crores. The government had already announced relief for borrowers who borrowed up to ??2 crore which was estimated to cost ??6,500 crore at the chessboard. With the announcement of the waiver for all borrowers, additional relief from ??7,000 to 7,500 crore will need to be provided to borrowers, ”said Anil Gupta, vice president (financial sector ratings) at Icra Ltd.

Read also | Six false calls for the post-covid economy

The government announced that loans to individuals and small businesses up to ??2 crore will benefit from the compound interest exemption during the moratorium period from March to August. Eight sectors to which this benefit has been extended are micro, small and medium enterprises (MSMEs), education loans, housing, consumer durables, credit card contributions, car loans, personal loans and professional and consumer loans. The moratorium, announced to help borrowers weather the covid-induced crisis, ended on August 31.

She had informed the court in October that if the government considered waiving interest on all loans and advances to all classes and categories of borrowers corresponding to the six-month moratorium period, the estimated cost would be ??6,000 billion. This is a complete waiver of interest and not just compound interest.

The Supreme Court said on Tuesday that there was no justification in policy to limit the benefit of the interest waiver on interest only to categories of loans below ??2 crores.

Meanwhile, the covid-19 pandemic has put a strain on government finances. Also in FY 22, central and state governments are expected to retain additional borrowing programs. It is estimated that the net borrowing of state governments will be ??6.5 trillion and central government net borrowing will be another ??9.5 trillion for the next fiscal year.

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Supreme Court Orders Compound Interest Waiver For All Borrowers

Compound interest

India’s Supreme Court has ordered a compound interest waiver for all borrowers who took advantage of a loan moratorium last year as part of the central bank’s Covid-related relief measures.

The Supreme Court found no justification for extending the waiver of compound interest or interest on interest only for loans up to 2 crore rupees, it said in a judgment on Tuesday. During the hearing of the case, the central government agreed to absorb the cost of interest on small loans of up to Rs 2 crore each for eight categories of borrowers. The total cost borne by the government was then estimated at Rs 6,500 crore.

Now, the highest court has declared that compound interest for all borrowers on a moratorium, regardless of the amount or category of the loan, must be waived and ordered that the amounts already recovered as interest on the loans. interest for the moratorium period be adjusted by the banks. The ICRA estimates that the extended waiver will cost an additional Rs 7,000-7,500 crore. “According to our estimates, compound interest for six months moratorium for all lenders is estimated at Rs 13,500-14,000 crore”, said Anil Gupta, Vice President – Financial Sector Rating at ICRA Ltd.

The Supreme Court also lifted the suspension granted on the classification of non-performing assets by banks. The interim relief granted earlier for not reporting the accounts of the respective borrowers while the NPA is vacant, said the order of the court consisting of Judge MR Shah, Judge Ashok Bhushan and Judge R Subhash.

The Supreme Court, however, rejected other pleas in the case, including a complete waiver of all interest, an extension of the moratorium period on loans, as well as requests to order the Reserve Bank of India and the government to grant new measures as well as some specific sectoral relief.

” When offering the financial aid packages, the financial constraint and / or the financial burden of the government should also be considered and taken into account, which can be taken into account by experts and the government and courts do not have the expertise to assess the financial burden, ‘the court’s highest decision said

In 2020, the RBI authorized banks to grant a moratorium on term loans to help mitigate the economic blow from the pandemic. The moratorium, which was initially for three months until May 31, was later extended until August 31.

The Supreme Court case began with a public interest dispute brought by Gajendra Sharma, a borrower seeking relief from interest payable during the moratorium period. The discussion on the scope of the relief before the higher court was gradually limited to a waiver of the part of the compound interest (interest on interest) applicable during the moratorium.

It was during those hearings that the Supreme Court in September issued an interim order stating that accounts that were not overdue like August 31 would not be declared NPA until further notice.

In October 2020, the government told the Supreme Court that it had decided to waive compound interest on loans up to 2 crore rupees for eight categories of borrowers, mostly retail and small businesses. Sectors affected by the Covid, such as electricity, hotels, have requested another specific remedy from the court.

The RBI, however, informed the court that the banks would decide on such relief via a loan restructuring under a special Covid waiver. This restructuring window closed on December 31.

However, the suspension of the overdue loan account declaration remained in effect. But banks have released pro forma figures for the quarters ended September and December 2020, keeping investors informed of the strain on balance sheets.


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The power of compound interest

Compound interest

Albert Einstein remarked: “Compound interest is the eighth wonder of the world. Whoever understands it deserves it. The one who doesn’t pay it. With a brief shining moment about two decades ago, the United States seemed to understand compound interest. The government has recorded four consecutive annual budget surpluses, with which it has repaid its debt. With less than estimated debt, interest charges have gone down, reducing that debt and so on. We knew about compound interest and made it our friend. We have earned it.

But the nation then decided it had other, more important priorities. Taxes have been cut and spending has gone up. Debt has increased so interest costs have increased. Year after year, composed, we paid for it. A financial crisis and a pandemic later, the nation is in a very different place from two decades ago. The government has released its outlook for the federal budget. It does not assume any further tax cuts or any further increases in spending.

The budget numbers in these projections go where current forces in economic activity, aging populations, etc. push them. With these projections, even though interest rates are assumed to rise slowly and return only to historical average levels, interest charges on public debt are by far the fastest growing portion of the federal budget.

This year, interest charges on the public debt are less than half of the costs of Medicare, which is the second fastest growing part of the budget. But after 2050, the interest bill will rise so rapidly that it will almost be the other way around, so interest charges will be more than a third higher than Medicare costs. The interest on the expenses will increase to become greater than the expenses themselves. It should not be allowed.

Driven by such a rise in interest charges, which adds to the deficit that must be borrowed, public debt will reach its previous all-time high relative to the size of the economy in less than 10 years. However, over the 30-year forecast horizon, the debt burden will almost double that peak. So the budget will skyrocket because of the higher interest charges, which in turn will increase not because of the higher interest rates, but simply because we have accumulated so much debt that we have to pay these debts on. interests.

Since the main cause of growing debt is the cost of interest, we can’t just cut spending to fix the problem. The other main spending items in the federal budget are social security, health insurance and defense, some or all of those who run for office pledge not to cut. The longer we wait to fix this problem, the worse it will be. A weak economy with a pandemic is not the best time to tackle this budget deficit, but the best time to deal with this problem is soon. We must prepare for this coming crisis.

If our generation does not pay its bills, it will leave massive tax hikes on our children and their children. This will leave a nation to deal with any future crises, whether it is due to a pandemic, climate change, or debt-ridden military attacks. This will force both government and business to fight in the financial markets to raise capital. When the government inevitably wins, businesses will be unable to borrow money. This will crowd out government funding for research, education and infrastructure, further slowing the economy. This will threaten a financial crisis once Treasury bond holders start to question whether investments will remain safe.

You don’t have to be Albert Einstein to understand these projections for the budget. Debt stacked on top of debt, creating compound interest costs, is a clear formula for disaster. This nation and its elected leaders must show integrity and strength to face this significant fiscal danger before it is too late and our bright future is shattered.

Joseph Minarik is Senior Vice President and Director of Research on the Conference Board’s Economic Development Committee. He was chief economist in Bill Clinton’s Office of Management and Budget.


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