Centre agrees relief to distressed Borrowers in the form of Waiver of Compound Interest: Govt. files affidavit before SC

Supreme-Court-waive - interest - Taxscan

The government has told the Supreme Court that it has decided to waive “interest on interest” on loans of up to Rs. 2 crore during the six-month moratorium period.

The petitioner, Gajendra Sharma sought a direction to declare the portion of the RBI‘s March 27 notification as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrower and creates hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution of India.

Earlier, the Supreme Court had said there was “no merit in charging interest on interest” for deferred loan payment instalments during the moratorium period announced in wake of the COVID-19 pandemic & that once moratorium is fixed, it should serve the desired purposes and the government should consider interfering in the matter as it could not leave everything to banks.

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.

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.

The government’s decision will benefit those clearing their dues on a variety of loans between March and August.

“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, education loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professionals and consumptions loans,” said the finance ministry in an affidavit before the Supreme Court.

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