Centre to waive 'interest on interest' on loans up to Rs 2 crore during moratorium

The government has told the Supreme Court that it will waive 'interest on interest' on loans up to Rs 2 crore during the six month loan moratorium. The waiver will prove to be a huge relief for small borrowers including micro, small and medium enterprises (MSMEs), and loans pertaining to education, housing, consumer durables, credit card dues, auto etc.

The Centre said in its affidavit submitted on Friday that the only solution is for the government to bear the burden of waiving of interest. "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," said the finance ministry.

The government had earlier refused to waive interest, stating that it would affect the banks. However, after a recommendation of a government panel, set up after the Supreme Court asked them to help borrowers, the Centre changed its stance.

The Reserve Bank of India had allowed borrowers to seek a six-month moratorium on all loans due to the pandemic. However, the banks and housing finance companies continued to charge interest on the entire amount -- the principal and the interest liability.

The ministry said, "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." It said that if banks were to take on that burden then a substantial part of their net worth would be wiped off.

"This was one of the main reasons why waiver of interest was not even contemplated and only payment of instalments was deferred," added the ministry.

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