The announcement, made in an affidavit before the Supreme Court, was welcomed by retailers and small businesses that have been hit the hardest by the pandemic. But it came twinned with a warning.
Bearing the cost of paying interest on interest, he told the court, “would naturally have an impact on several other urgent commitments facing the nation, including paying the direct costs associated with managing the pandemic, addressing the basic needs of man. common and mitigate the common man’s problems that arise from the loss of their livelihoods.
He also said that he did not waive the interest charged on all loan categories because that would have made it difficult for the banks to survive.
In its affidavit, the government said that due to unprecedented conditions “the only solution is for the government to bear the burden of waiving interest” and that it will seek Parliament’s approval for the decision.
The measure includes those who have paid their installments, and compound interest will be eliminated for eight sectors: micro, small and medium enterprises (MSMEs), loans for education, housing, durable consumer goods, credit card installments, loans for automobiles, personal and professional loans. and consumer loans.
Certainly, the interest on the loan itself has not been waived.
The Finance Ministry said in the petition Saturday that waiving charges for all loan categories would result in a ₹Charge of 6 trillion to the banks. “If banks were to bear this burden, it would necessarily wipe out a significant portion of their net worth, rendering most banks unviable and raising a very serious question mark about their survival.”
The Finance Ministry will have to seek Parliament’s approval in the winter session to obtain additional funds to support the compound interest exemption. The immediate impact of the exemption on public finances is unknown.
The Reserve Bank of India (RBI) extended the moratorium on loans on May 22 until August 31, as businesses came to a standstill amid the nationwide shutdown. In March, it had allowed a three-month moratorium on the payment of EMI and on the payment of all term loans that are due between March 1 and May 31.
On September 28, the high court postponed the loan moratorium case until October 5, giving the Center, the RBI and the banks more time to work together and present a response on their position on the waiver of interest charged. during the moratorium period.
Petitioner Gajendra Sharma, a borrower from Agra, had argued that no interest should be charged during the moratorium because people face “extreme hardship”.
The measure will benefit retail and small businesses with loans of up to ₹2 million rupees, categories that endured the brunt of the pandemic.
While the final decision rests with the Supreme Court, the government’s decision to shoulder the burden will also include borrowers who have not availed themselves of the moratorium. That said, the bankers indicated that the exemption will apply to those who have not taken advantage of the moratorium and have defaulted on payments during the six months from April to September.
The court will hear the case next Monday.
“This effort will be above the support of ₹3.7 trillion to MSMEs, ₹Rs 70 billion for home loans, etc. they have already been exercised through the Garib Kalyan and Aatma Nirbhar packages previously announced by the government, “the government said in the affidavit.
Last month, Parliament passed a ₹Rs 20 billion infusion into public sector banks through government securities as the COVID-19 crisis put pressure on borrowers, increasing the threat of increased non-performing assets.
A senior government official told Mint that there will be more clarity on Monday, after the Supreme Court hearing. “The implementation and the modalities of how the benefit of the exemption will be granted to the borrowers will be decided once the final judgment is issued,” said the official.
The official said the exemption may cost the government more than ₹Rs 20 billion, mainly due to the presence of large categories of lenders, including public and private sector banks, non-bank financers, small finance banks, and others.
Analysts, however, say that the cost to the treasury will be approximately ₹5,000-7,000 crore.
According to a senior banker at a private sector bank, the idea of bearing the burden is a welcome decision, given that most Indian banks are starved for capital and this would have further depleted resources.
“The responsibility for such welfare initiatives rests with the government and it is a good measure not to force banks to bear such costs. However, the modalities must be worked out and only then will a clearer picture emerge,” said the banker.
He warned that it will lead to a gigantic EMI recalculation exercise by banks already in the middle of a debt consolidation exercise.
Apart from that, you also have to see how long it takes for the government to reimburse the compound interest costs to the banks. Typically, in the case of farm loan exemptions, it takes state governments a few months to a year to repay banks.
The pandemic has undoubtedly stretched the government’s finances, forcing it to borrow more than initially budgeted. The total amount raised so far this year has been ₹7.7 trillion or 82% more than in the corresponding period last year, Care Ratings said in a report on Sept. 25.
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