The finance ministry, in an affidavit submitted in the Supreme Court on Friday, said it supports the waiver of compound interest for loans under a moratorium for certain categories. The submission comes ahead of the hearing on October 5, when the court is expected to deliver its verdict in the matter.

According to the affidavit submitted in the court, the government has effectively reversed its earlier stand on compound interest or ‘interest on interest’ waiver, experts feel.

The ministry will support the waiver of compound interest only for the smaller borrowers, and not the large borrowers. Small ticket affordable housing loans, personal loans, education loans, MSME loans, auto loans, credit card loans up to Rs 2 crore would be considered for the compound interest waiver by the government

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 affidavit has been filed by Aditya Kumar Ghosh, under-secretary in the ministry of finance, after the apex court asked the government to make its position clear on the issue.

The court, which will take up the Centre’s affidavit next week, had passed the earlier direction while dealing with a batch of petitions filed by UP-based businessman Gajendra Sharma and several others challenging the decision of the banks to collect interest and also interest on interest during the six month moratorium period which ended on August 31, 2020.

The RBI had earlier in March this year announced the moratorium on loans in view of the severe pandemic in the country.

“This category of borrowers, in whose case the compounding of interests will be waived, would be MSME loans and personal loans up to Rs 2 crore. “In other words, any individual/entity whose loan amount is more than Rs 2 crore will not be eligible for waiver of the compounding of interests,” the ministry clarified.

Deferred interest

According to the Centre, the RBI’s intention to provide “moratorium” was never intended to be a “waiver of interests” but “deferment of interest”.

“The majority of the borrowers have in fact not taken the benefit of the moratorium which is nothing but deferment of payment of installments.

“If the government were to consider waiving interests on all the loan and advances to all classes and categories of borrowers corresponding to the six month period for which the moratorium was made available under the relevant RBI Circulars, the estimated amount is more than Rs 6 lakh crore,” the Centre said.

By way of illustration the affidavit said in case of State Bank of India alone, waiver of six months interests would completely wipe out over half of the bank’s net worth which has accumulated over nearly 65 years of its existence.

NPA norms

Referring to concerns over downgrading of accounts as NPAs and consequent impact on credit ratings, the government said: “Any account becoming non-performing even due to the bank’s or any other delay, need not suffer from being labeled as NPA.”