Most individual borrowers of housing, educational and personal loans as well a sizeable section of MSMEs will benefit, as the government on Saturday agreed in the Supreme Court 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 given to all such loans by such categories of borrowers, whether or not they availed themselves of the moratorium facility.
Bankers say while a precise estimate of the cost to exchequer of the move is hard to put out now, it could be anywhere between Rs 10,000 crore and Rs 20,000 crore, depending on the guidelines for implementation.
However, the government argued strongly against extending such relief “for all types of loans for all categories of borrowers”, saying “such a blanket decision would cause a huge burden of Rs 6 lakh crore on banks, likely wiping out a major part of their net worth and even rendering most of them unviable”.
The affidavit has been filed by the Centre in response to a batch of pleas in the apex court raising issues pertaining to validity of RBI’s March 27 circular, which allowed lending institutions to grant moratorium on payment of installments of term loans falling due between March 1, 2020 and May 31 this year due to the pandemic (the circular’s validity subsequently got extended to August 31).
The government’s decision follows a firm stand taken by the court that moratorium would be meaningless unless at least the interest on interest is waived for the period.
Affirming its commitment to protect the borrowers, whose repayment capacity has been affected by Covid-19 and the lockdown, the apex court, in an interim order on September 3, had asked the government and RBI that the accounts which were not declared NPA as on August 31, the day a six-month moratorium period ended, should not be treated as NPAs till its further orders. It also asked banks not to take any coercive action against borrowers. These orders stay.
A bench headed by Justice Ashok Bhushan is likely to take up the matter for hearing on October 5. The court’s decision will be eagerly watched, as an extension of the waiver to other classes of borrowers could exacerbate the government’s already precarious fiscal position.
The finance ministry stated in the affidavit thus: “This category of borrowers, in whose case the compound interest will be waived, would be MSME loans and personal loans up to `2 crore of the following category — MSME loans, educational loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professionals and consumption loans.”
It said the government would seek due authorisation from Parliament for making appropriate grants in this regard and the endeavour shall be over and above the support of Rs 3.7 lakh crore to MSMEs, Rs 70,000 crore for home loans, etc, already extended through the Garib Kalyan and Aatma Nirbhar packages announced earlier.
According to the affidavit, “as part of effective fiscal planning…, a delicate balancing act is required in dealing with the financial impacts of the pandemic. It has to 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 issue, the apex court and the government-RBI-banks combine could not find a meeting ground. As the court found a dichotomy between the moratorium and ‘penal’ (compound) interest, the government through its top attorneys stressed that waiver of interest or interest on interest is in conflict with the basic canons of finance. The government continued to draw the court’s attention to the facility of one-time restructuring of loans being made available to borrowers of assorted nature and loans of various kinds, and flagged it as a viable way of addressing the plight of borrowers, who are not defaulters by nature, without compromising on financial stability.