The government of India told the Supreme Court that it has decided to waive "interest on interest" on loans of up to £200,000 during the six-month repayment moratorium - with the benefit also available to those who were clearing their dues on a range of loans between March and August.
In its affidavit, the finance ministry said the government has decided to maintain its tradition of hand-holding small borrowers and bear the burden arising from such waiver of interest on interest, or compound interest, for the banks.
“This category of borrowers, in whose case, the compound interest will be waived, would be MSME loans and personal loans up to £200,000 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.
The Reserve Bank of India had allowed borrowers to seek a six-month moratorium on all loans but banks and housing finance companies were charging interest on the entire amount, the principal as well as the interest liability, which translated into the repayment period extending by over 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.
Bankers said the total cost of compound interest waiver, if the benefit was restricted to only these categories, would be around £500 to 600 million. However, if the scheme was extended to all borrowers, the total cost of compound interest waiver would be between £1 billion to 1.5 billion.
Bankers expect govt to compensate
Bankers are expecting the government to compensate the interest waiver as it is a social welfare measure. The modalities of how the benefit would flow to those who were paying their EMIs or credit card dues during the moratorium period were not immediately known.
The Centre has reversed its stand following the recommendations of an expert committee headed by former Comptroller & Auditor General Rajiv Mehrishi. Earlier, the Centre and 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.
