Stating that a complete waiver of interest for loan repayments during the moratorium period would affect the very survival of banks and create problems for depositors, the Centre has told the Supreme Court that it has decided to waive compound interest on MSME and personal loans up to Rs 2 crore for the six-month period.
In an affidavit filed in the top court, the Union Finance Ministry said that “after careful consideration and weighing all possible options, the… Government… has decided that the relief on waiver of compound interest during the six-month moratorium period shall be limited to the most vulnerable category of borrowers”.
“This category of borrowers…would be MSME loans and personal loans up to Rs. 2 crore” and would include education, housing, auto, consumption and consumer durable loans, personal loans to professionals and credit card dues of up to Rs 2 crore.
The affidavit comes in response to a petition seeking a waiver of the interest.
Interest stays but big relief
This is a big relief to MSME and personal loan borrowers. But borrowers will have to pay the interest on their outstanding loans for the moratorium period they opted for. Banks won’t add that interest component to the principal outstanding at the end of the moratorium to calculate fresh EMI at current interest rate.
The Government said it will seek due authorisation from Parliament for making “appropriate grants in this regard” and this “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 AatmaNirbhar packages announced” to deal with the Covid impact.
Arguing against a blanket waiver, the government said the word “moratorium” is categorically defined by the RBI while issuing various circulars and “was never intended to be “waiver of interest” but “deferment of interest”.
“After a very careful and major consideration of several fiscal and financial criteria, its inevitable effects and keeping the uncertainty of the existing situation in mind, the payment of interest and interest on interest was merely deferred and was never waived”, the ministry said.
It said that borrowers have understood the difference between the waiver and deferment and “therefore, a majority of the borrowers (more than 50 percent) have in fact not taken benefit of the moratorium which is nothing but deferment of payment of instalments.”
If the interest is waived on all the loans and advances with regard to all classes and categories of borrowers, the amount to be foregone would be more than Rs 6 lakh crores, the government pointed out.
“If the banks were to bear this burden, it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark over their very survival”, it added.
For example, such an exercise “would completely wipe out over half of the State Bank of India’s “net worth which has accumulated over nearly 65 years of its existence”.
The Centre also sought to link the receipt of interest from borrowers to payment of interest to depositors who it said “are…small depositors, pensioners etc. surviving on the interest from their deposits”.
The affidavit pointed out there are an estimated 8.5 deposit accounts in India for every loan account and added that to keep the cycle going, “the contractual interest on all outstanding advances will have to be charged even during the period of deferment and if this compounding interest is not received from the borrowers for any particular period, a commensurate denial of interest to customers holding deposits is inevitable and unimaginable and would obviously be unacceptable considering the categories of depositors”.
Hearing the matter on September 3, the court had directed that accounts which have not been declared as NPAs as of August 31 should not be declared so till further orders.
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