Compound interest

Modi’s government agrees in SC to waive compound interest on loans up to Rs 2 crore for 6 months


File photo of Union Finance Minister Nirmala Sitharaman | ANI

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New Delhi: To relieve individual borrowers and medium and small industries, the Center agreed in the Supreme Court to waive compound interest (interest on interest) charged on loans up to Rs 2 crores for a six-month moratorium period announced in due to COVID. -19 pandemic.

He said the government will seek authorization from Parliament to provide the appropriate grants in this regard and that the effort will extend beyond supporting Rs 3.7 lakh crore to MSMEs, Rs 70,000 crore for loans real estate, etc. already granted via the Garib Kalyan and Aatma Nirbhar Packages announced by the government earlier.

In an affidavit filed by the Union Ministry of Finance on behalf of the Indian Union, he stated that the relief granted to all borrowers with respect to the composition of interest during the moratorium period would be admissible in the categories specified, whether or not borrowers have made use of the moratorium.

The government has therefore decided that the relief from the waiver of compound interest during the six-month moratorium period will be limited to the most vulnerable category of borrowers. This category of borrowers, in the event that the interest mix is ​​removed, would be loans to MSMEs and personal loans of up to Rs 2 crore, he said.

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The loans have been categorized into eight categories by the government, including MSMEs (micro, small and medium enterprises), education, housing, consumer durables, credit card contributions, automobile, individuals and consumption.

He further stated that any person / entity whose loan amount is more than Rs 2 crore will not be eligible for interest compounding waiver.

He said that in view of the cumulative circumstances, after careful consideration and evaluation of all possible options, the government has decided to continue the tradition of empowering small borrowers.

The affidavit was filed by the Center in response to a series of arguments before the Supreme Court raising questions about the validity of the RBI’s March 27 circular which allowed lending institutions to grant a moratorium on payment. term loan payments maturing between March 1, 2020 and May 31 of this year due to the pandemic.

Later, the moratorium period was extended until August 31.

Earlier in this case, the Center told the highest court that waiving interest on deferred IMEs during the moratorium period would be contrary to basic canons of funding and unfair to those who repay loans on schedule.

In the new affidavit, the Center said that waiving compound interest would result in a very large and significant financial burden and that it is impossible for banks to bear the burden without passing the financial impact on to depositors or adversely affecting their value. net, which would not be in the broader national economic interest.

He said the only solution under the circumstances is for the government to bear the burden resulting from the waiver of compound interest and this court would be satisfied that the government bearing this burden would naturally have an impact on several other urgent commitments facing the nation.

Regarding the downgrade of loan accounts from standard asset to non-performing asset (NPA) and the resulting impact on credit ratings, the Center said any account becoming non-performing even due to the bank’s delay or any other delay, will not suffer from being labeled as NPA.

The Center said it had suspended, from March 25, the application of the provisions of the Insolvency and Bankruptcy Code of 2016 (IBC) to protect corporate borrowers affected by the COVID-19 crisis.

He said the word moratorium is categorically defined by the RBI when issuing various circulars that show the moratorium was never intended to be a waiver of interest but a deferral of interest.

The government said borrowers understood the difference between waiving interest on the loan and deferring payment of installments for that loan. Therefore, a majority of borrowers have not taken advantage of the moratorium which is nothing more than the postponement of installment payments.

While it may not be possible to give the exact percentage of borrowers who did not take advantage of the moratorium and file installments, this category would be around more than 50%, he said.

The central government said that if it considered waiving interest on all loans and advances to all classes and categories of borrowers for a six-month period for which the moratorium was made available under RBI circulars , the estimated amount lost will be greater than Rs 6 lakh crore.

If banks were to bear this burden, it would necessarily wipe out a substantial and major part of their net worth, rendering most banks unsustainable and raising a very serious question mark as to their very survival, he said.

On September 28, the Center informed the Supreme Court that a decision would likely be rendered in two to three days on the imposition of compound interest by banks on payments that were deferred during the moratorium period due to the COVID-19 pandemic.

A bench led by Judge Ashok Bhushan is expected to take the case for hearing on October 5.

On September 3, to relieve stressed borrowers facing difficulties due to the impact of the pandemic, the highest court declared that accounts that had not been declared as non-performing assets until August 31 of this year, would not be declared postcode until further orders.

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