Will waive compound interest for loans up to ₹2 crore, govt informs Supreme Court

The Centre has knowledgeable the Supreme Court that it’s going to proceed to “hand-hold” small and weak debtors and waive the compound interest (interest on interest) gathered towards their loans through the six-month moratorium interval.

The waiver of compound interest is simply relevant for loans up to ₹2 crore, an extra affidavit filed by the Ministry of Finance advised the Supreme Court.

The reduction of waiver of compound interest through the six-month moratorium shall be for MSME, training, housing, shopper durables, bank card, auto, private and consumption loans, all up to ₹2 crore.

“The government has decided to continue to hand-hold the small borrowers,” the affidavit mentioned.

The authorities made it clear that “any individual or entity whose loan amount is more than ₹2 crore will not be eligible for waiver of compounding of interest”.

The 20-odd web page affidavit reasoned that banks would undergo a lack of ₹6 lakh crore if the federal government agreed to a whole waiver of loans to all debtors of all classes for your entire moratorium.

“It would wipe out the substantial and major part of the banks’ net worth, rendering most of them unviable,” the Ministry mentioned.

A blanket waiver throughout the spectrum would “raise a very serious question mark over their (banks) very survival”.

Even for the State Bank of India, a sweeping waiver would wipe out over half its web price gathered over almost 65 years of its existence.

“The only solution is for the government to bear the burden of waiver of compound interest,” the federal government mentioned categorically.

It mentioned even this restricted waiver could have an effect on “pressing commitments to the nation, including meeting direct costs associated with pandemic management, addressing basic needs of common man” and so forth.

Not a ‘waiver’

The authorities reasoned that ‘moratorium’ by no means meant ‘waiver’. It solely had meant ‘deferment’.

“Borrowers had understood the difference between waiver and deferment of payment of instalments for that loan — therefore a majority of borrowers did not take the moratorium. More than 50% of the borrowers did not avail of the moratorium,” the federal government mentioned.

Most importantly, cost of interest to depositors was important for banking. Small depositors, pensioners, and so forth. survive on the interest from their deposits.

Going any additional than a restricted waiver could be detrimental to the general financial situation.

“Jobs need to be safeguarded and every attempt made to bring back economic growth. Use of public resources for any one category of stakeholders must be carefully calibrated. Unintended consequences can arise and financial stability itself could be imperilled,” the affidavit cautioned.

On considerations addressed in courtroom in regards to the downgrading of mortgage accounts from ‘Standard’ to ‘Non-Performing Assets (NPAs), the government said the resolution framework announced by the Reserve Bank of India (RBI) provides that loan accounts which slip into NPAs between invocation and implementation may be upgraded as ‘Standard’ on the date of implementation itself.

The authorities assuaged apprehensions that credit standing could document a downgrade to NPA for defaults through the moratorium. It mentioned the Securities and Exchange Board of India (SEBI) had already issued a round on March 30 offering for leisure from recognition of default due to the moratorium.

A second round on August 31 has buttressed the sooner assurance. In future, the federal government would interact with the SEBI on this regard for a “holistic and humane view in resolving issues”.

The authorities touched upon requests for additional reduction and regulatory dispensation for companies apart from MSME. The Centre mentioned a number of steps had been taken on this regard, together with the suspension of essential provisions of the Insolvency and Bankruptcy Code from March 25, the primary day of the pandemic lockdown.