Loan moratorium: Center tells SC it will waive compound interest on specified loans of up to Rs 2 crore

The government’s move follows a firm position taken by the court that the moratorium would make no sense unless at least interest on interest is waived for the period.

Most individual borrowers of home, education and personal loans as well as a significant portion of MSMEs will benefit as the government agreed to the Supreme Court on Saturday to waive compound interest on their loans of up to Rs 2 crore. for the six-month (March-August) moratorium period. The waiver of interest on interest will also be granted to all such loans by these categories of borrowers, whether or not they have taken advantage of the moratorium facility.

Bankers say that although an accurate estimate of the cost to the Treasury of the move is difficult to come up with now, it could be between Rs 10,000 crore and Rs 20,000 crore, depending on implementation guidelines.

However, the government strongly opposed the extension of such relief “for all types of loans for all categories of borrowers”, claiming that “such a general decision would result in a huge charge of Rs 6 lakh crore on the banks, probably wiping out much of their income. net worth and even make most of them unsustainable ”.

The affidavit was filed by the Center in response to a series of arguments before the Supreme Court raising questions about the validity of RBI’s March 27 circular, which allowed lending institutions to grant a moratorium on payment. term loan payments maturing between March 1. 2020 and May 31 of this year due to the pandemic (the validity of the circular was then extended until August 31).

The government’s move follows a firm position taken by the court that the moratorium would make no sense unless at least interest on interest is waived for the period.

Affirming its commitment to protect borrowers, whose repayment capacity has been affected by Covid-19 and confinement, the high court, in an interim order of September 3, asked the government and RBI that the accounts that were not declared NPA as on August 31, the end of a six-month moratorium period, should not be treated as an NPA until its new orders. He also called on banks not to take any coercive action against borrowers. These orders remain.

A bench led by Judge Ashok Bhushan is expected to take the case for hearing on October 5. The court’s decision will be eagerly watched, as an extension of the waiver to other categories of borrowers could worsen the government’s already precarious fiscal position.

The Ministry of Finance stated in the affidavit as follows: “This category of borrowers, in the event that the compound interest is waived, would be MSME loans and personal loans up to 2 crore from the following category – MSME loans , educational loans, home loans, durable consumer loans, credit card contributions, auto loans, personal loans to professionals and consumer loans.

He said the government would seek permission from parliament to provide appropriate grants in this regard and that the effort will extend beyond supporting MSMEs of 3.7 lakh crore, Rs 70,000 crore for loans. real estate, etc., already extended through the Garib Kalyan. and the Aatma Nirbhar packages announced earlier.

According to the affidavit, “As part of effective tax planning… a delicate balance is needed to deal with the financial impacts of the pandemic. It must conserve financial resources for the long and uncertain battle on the public health front which has its own huge financial implications. “

Despite a series of hearings on the matter, the Supreme Court and the government-RBI-banks association could not find a meeting ground. As the court found a dichotomy between the moratorium and “penal” (compound) interest, the government, through its principal lawyers, pointed out that the waiver of interest or interest on interest conflicts with the canons. basic finance. The government continued to draw the court’s attention to the possibility of ad hoc restructuring of loans made available to borrowers of various kinds and of loans of various types, and pointed out this as a viable means of remedying the situation. criticism of borrowers, who are not in default. by nature, without compromising financial stability.

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