What the interest on interest waiver means

The Centre has told the Supreme Court that it is ready to waive certain interest levies on loans of up Rs 2 crore under moratorium. This essentially means compound interest or interest on interest will be scrapped for loans taken out for purposes including education, housing and credit-card dues, a move that will bring relief to millions of borrowers, including those who have cleared their dues for a range of loans made between March and August. The government will bear the burden of the money, the finance ministry said in an affidavit filed in the Supreme Court."This category of borrowers, in whose case the compound interest will be waived, would be MSME loans and personal loans up to Rs 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," the ministry said in its affidavit. 78455452The Reserve Bank of India had allowed borrowers to seek a six-month moratorium on loans but banks and housing finance companies were imposing charges on both the principal and the interest, which translated into the repayment period being extended by more than six months.The liability was higher for recent loans as the interest component is typically front-loaded. Besides, there was a huge increase in liability on the outstanding on credit cards, which come with high interest rates, a TOI report said.The total cost of interest on interest waiver would be around Rs 5,000 crore-Rs 6,000 crore, the report added. This number may be between Rs 10,000 crore-Rs 15,000 crore if the facility is extended to all borrowers. Bankers see the Centre compensating the interest waiver as a social welfare measure.How this benefit would flow to those who were paying their EMIs or credit card dues during the moratorium period is not clear yet. The Centre, the TOI report added, reversed its stand following the recommendations of an expert committee headed by former Comptroller & Auditor General Rajiv Mehrishi. Earlier, the Centre and the RBI had argued against waiver of interest on interest on the grounds that it would be against the interests of other stakeholders, especially depositors, and would be unfair to those who have paid their dues.A bench of Justices Ashok Bhushan, R S Reddy and M R Shah had been impressing upon the government to "consider and reconsider" its decision to not waive interest on interest. However, it had appeared to accept the government's decision to not waive interest altogether.The Centre said waiving of interest on interest for all categories of borrowers would result in a very substantial and significant financial burden on several categories of banks, which would find it impossible to withstand the financial burden. As this would also impact the depositors' interest, the government decided not to waive it for big borrowers."The government, therefore, 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," the ministry said. This would mean loans up to Rs 2 crore.The RBI and the Centre had earlier argued that the moratorium was merely deferring loan instalments to a future date and that it did not mean waiving either interest on the amount due during the six-month period, or interest on the interest accrued during the period on the principal.It had said that borrowers understood the difference between the waiver in the interest on loan and the deferment of payment of instalments for that loan and therefore, "a majority of the borrowers have in fact not taken the benefit of the moratorium"."If the government were to consider waiver of interest on all types of loan advances to all categories of borrowers corresponding to the six-month period for which the moratorium, that is deferment of payment of instalments, was made available under the relevant RBI circulars, the estimated amount waived would be more than Rs 6 lakhs crore," the ministry said.It said that if the banks were to bear the burden, a substantial part of their net worth would be wiped out, rendering most banks unviable. "This was one of the main reasons why waiver of interest was not even contemplated and only payment of instalments was deferred," it said.Over half of the State Bank of India’s net worth would be wiped out if interest was waived for six months, the government said.

from Economic Times https://ift.tt/3n9nL8N