Centre to Waive Compounded Interest for Loans of up to Rs. 2 Crore

Economic uncertainty has resulted in mass unemployment

The Coronavirus Pandemic has created a climate of economic uncertainty. According to the data released by the Centre for Monitoring Indian Economy (CMIE), the number of salaried jobs lost due to the COVID-19 pandemic from April to August stood at 21 million from with more than 3.3 million jobs lost in August and about 4.8 million in July. This data indicates the prevailing loss of jobs and the resultant financial crunch among various income groups in the country.

RBI extended the period of loan moratorium till August 31

On March 22, the country went into a complete lockdown. As a measure to keep the economy stable and to provide relief to the people facing financial distress, the Reserve Bank of India (RBI), on March 27, allowed the banks to grant a moratorium on the payment of loan installments due between March 1 and May 31. This moratorium was later extended till installment due until Aug. 31. 

A number of petitions were filed in the Supreme Court that demanded a waiver of interest, or waiver of interest on interest component of the suspended monthly installments during the moratorium period. After Aug. 31, the Supreme Court passed an interim order which stated that accounts should not be declared NPAs till further notice. This interim order was further extended till Sept. 28. This gave the Centre two more weeks "to come up with something concrete" in the case related to an optional moratorium on repayment of loans. However, on Sept. 28, the Court gave the Centre one more week to submit a loan moratorium plan. 

Finally, on October 3, the Central government filed an affidavit before the Supreme Court, the Central government stated that for the six-month loan moratorium period introduced in light of the COVID-19 pandemic, it will waive compound interest on personal and small loans of up to Rs. 2 Crores keeping with its tradition of "hand-holding small borrowers". The loans that will have their compound interest waived include MSME loans, education loans, housing loans, and personal loans, among others.

Banks cannot bear the burden of waiving interest as it will result in a loss of 6 lakh crores

The Centre has reiterated that it cannot agree to waive all interest on borrowings for the period of moratorium since the move would burden the banks with an estimated amount of Rs. 6 lakh crores. The affidavit stated,

"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 survival. The only solution is that the government bears the burden resulting from waiver if compound interest. This Hon'ble Court would be satisfied that the government bearing this burden would naturally have an impact on several other pressing commitments being faced by the nation including meeting direct costs associated with pandemic management addressing basic needs of the common man arising out of the loss of livelihood."

The next hearing is scheduled for October 5.