The finance ministry, in an affidavit submitted in the Supreme Court on Friday, said it supports the waiver of compound interest for loans under a moratorium for certain categories, three people aware of the matter told CNBC-TV18. The submission comes ahead of the hearing on October 5, when the court is expected to deliver its verdict in the matter.
As per the affidavit submitted in the court, the government has effectively reversed its earlier stand on compound interest or ‘interest on interest’ waiver, said people in the know.
The ministry will support the waiver of compound interest only for the smaller borrowers, and not the large borrowers, one of the people quoted earlier clarified. Small ticket affordable housing loans, personal loans, education loans, MSME loans, auto loans, credit card loans, etc up to Rs 2 crore would be considered for the compound interest waiver by the government, another person added.
However, in order to ensure that those borrowers who repaid loans on time are not penalised for doing so by being left out of the benefit, the government is likely to extend the relief to all borrowers of the selected categories whether they availed of the moratorium or not, added this person. The nature of this relief is still unclear, and modalities are expected to be worked out with banks in the coming days.
Also, to bring in parity between the borrower who availed moratorium and one who didn't, a notional amount of interest on interest will need to be reduced from the principal amount outstanding against the borrower who didn't avail moratorium, the affidavit said.
Assuming not more than 30-40 percent of the overall loans of the banks and NBFCs will be eligible for relief, the cost to the government should not exceed Rs 5,000-7,000 crore. This is assuming all borrowers are given relief irrespective of they availing the moratorium or not, the filing said.
The waiver of interest on interest will benefit 6 crore of the most vulnerable borrowers, said a senior government official on the condition of anonymity. This person said that the likely liability of the waiver would be to the tune of Rs 5,000 crore to Rs 6,000 crore, which the government will bear.
This is in line with what the three-member expert committee led by former CAG Rajiv Mehrishi had suggested.
Earlier in March, the Reserve Bank allowed banks, other financial institutions to permit a moratorium on loan repayment falling due between March 1 and May 31 without downgrading asset classification to protect those impacted by the pandemic. The three-month moratorium was further extended by another three months up to August 31 by RBI later.
Although the moratorium period has ended, the Supreme Court has directed banks to keep any accounts that were standard as on August 31 in the standard category until it delivers the final verdict.