Much to the relief of thousands of people and MSME borrowers, the Center in an affidavit informed the Supreme Court that it had made the decision to waive “interest on interest” on loans of up to Rs 2 million during the moratorium period six months.
The affidavit said the only solution is for the government to bear the burden resulting from the compound interest exemption. “After careful consideration and weighing all possible options, the responding Union of India has decided to continue the tradition of holding small borrowers by the hand,” said the Center. Loan categories up to Rs. 2 crore include: MSME Loans, Education Loans, Home Loans, Durable Consumer Loans, Credit Card Installments, Auto Loans, Personal Loans for Professional and Consumer Loans.
The Center said it is impossible for banks to bear the burden resulting from the compound interest exemption without passing the financial impact on to depositors or adversely affecting their net worth, which would not be in the public interest.
The affidavit read: “The government has therefore decided that the exemption from the compound interest exemption during the six-month moratorium period will be limited to the most vulnerable category of borrowers.” Following the recommendations of a committee of experts, the Center has modified its position. Previously, the RBI and the Center had argued against the waiver of interest on interest, as it would go against the interests of other stakeholders, especially depositors, and would also be unfair to those who have paid their fees.
A bank comprised of Justices Ashok Bhushan, RS Reddy and MR Shah had urged the Center to review its decision in the context of the financial difficulties faced by many amid the ongoing Covid-19 pandemic. Although, the higher court had agreed not to waive interest entirely.
The Center said the Supreme Court would be pleased that the government bearing this burden will naturally have an impact on several other urgent commitments facing the nation, including meeting the direct cost association with managing the pandemic. The Center also cited the example of the renunciation of the interests of the banks. “In the case of SBI alone, the six-month interest exemption would completely eliminate more than half of the bank’s net worth, which has been accumulated over almost 65 years of existence,” the affidavit says.
The superior court will address the matter on October 5 for an additional hearing. A handful of petitions were filed in the superior court seeking a waiver of interest on deferred EMI interest during the moratorium.
