Supreme Court center agrees to waive compound interest on loans up to Rs 2 crore for six months
In a relief for individual borrowers and medium and small industries, the Center agreed in the Supreme Court to waive compound interest (interest on interest) charged on loans up to Rs 2 crores for a six month moratorium period. announced due to COVID. -19 pandemic.
He said the government will seek authorization from Parliament to provide the appropriate grants in this regard and that “the effort will extend beyond supporting Rs 3.7 lakh crore to MSMEs, Rs 70,000 crore for MSMEs. home loans etc. already extended through Garib Kalyan and Aatma Nirbhar packages announced by government earlier ”.
In an affidavit filed by the Union Ministry of Finance on behalf of the Indian Union, he stated that the relief granted to all borrowers with respect to the composition of interest during the moratorium period would be admissible in the categories specified, whether or not borrowers have made use of the moratorium.
“The government has therefore decided that the waiver of compound interest relief during the six-month moratorium period will be limited to the most vulnerable category of borrowers. This category of borrowers, in the event that the interest mix is removed, would be loans to MSMEs and personal loans of up to Rs 2 crore, ”he said.
The loans have been categorized into eight categories by the government, including MSMEs (micro, small and medium enterprises), education, housing, consumer durables, credit card contributions, automobile, individuals and consumption.
He further stated that any person / entity with a loan amount greater than Rs 2 crore will not be eligible for interest compounding waiver.
He said that given the cumulative circumstances, after careful consideration and weighing all possible options, the government has decided to continue the tradition of empowering small borrowers.
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 that 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.
Later, the moratorium period was extended until August 31.
Earlier in the case, the Center told the highest court that waiving interest on deferred IMEs during the moratorium period would be contrary to “basic canons of finance” and unfair to those who repay loans. according to schedule.
In the new affidavit, the Center said that waiving compound interest would result in a very large and significant financial burden and that it is impossible for banks to bear the burden without passing on the financial impact to depositors or adversely affecting their value. net, which would not be in the wider national economic interest.
He said the only solution in the circumstances is that “the government should bear the burden resulting from the waiver of compound interest and this tribunal would be satisfied that the government bearing this burden would naturally have an impact on several other urgent commitments facing the nation. “.
Regarding the downgrade of loan accounts from standard asset to non-performing asset (NPA) and the resulting impact on credit ratings, the Center said any account becoming non-performing, even due to the delay in the bank or any other delay, will not suffer from being labeled as NPA.
The Center said it had suspended, from March 25, the application of the provisions of the Insolvency and Bankruptcy Code of 2016 (IBC) to protect corporate borrowers affected by the COVID-19 crisis.
He said the word “moratorium” is categorically defined by the RBI while issuing various circulars which show that “moratorium” was never intended to be a “waiver of interest” but a “postponement of interest. “.
The government said borrowers understood the difference between waiving interest on the loan and deferring payment of installments for that loan. Therefore, a majority of borrowers have not taken advantage of the moratorium which is nothing more than the postponement of installment payments.
“While it may not be possible to give the exact percentage of borrowers who did not take advantage of the moratorium and file installments, approximately this class would be above 50%,” he said. declared.
The central government said that if it considered waiving interest on all loans and advances to all classes and categories of borrowers for a six-month period for which the moratorium was made available under RBI circulars , the estimated amount lost will be greater than Rs 6 lakh crore.
“If banks were to bear this burden, it would necessarily wipe out a substantial and major part of their net worth, rendering most banks unsustainable and raising a very serious question mark over their very survival,” he said. .
On September 28, the Center informed the Supreme Court that a decision would likely be rendered in two to three days on the imposition of compound interest by banks on payments that were deferred during the moratorium period due to the COVID-19 pandemic.
A bench led by Judge Ashok Bhushan is expected to take the case for hearing on October 5.
On September 3, to relieve stressed borrowers facing difficulties due to the impact of the pandemic, the highest court declared that accounts that had not been declared as non-performing assets until August 31 of this year, would not be declared postcode until further orders.