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The Government has informed the Supreme Court that loans up to ₹2 crore taken by individuals and Micro, Small and Medium Enterprises (MSMEs) will be eligible for waiver of compound interest during the six-month moratorium period, i.e., March-August 2020.
In other words, these borrowers will not have to pay interest on interest. During the period of moratorium, interest accrued in case of equated monthly instalment (EMI) deferred becomes a part of principal and then interest calculated on the larger base. This compound interest is basically interest on interest.
“The Union of India has decided to continue with the tradition of handholding the small borrowers. The Government, therefore, has decided that the relief in waiver of compound interest during the six-month moratorium period shall be limited to the most vulnerable category of borrowers,” the affidavit submitted by the Centre dated October 2 said. Now the apex court will hear a bunch of pleas on October 5 before issuing an order.
Though, the government has not mentioned the cost of this waiver, according to industry sources, it could be up to ₹6,000 crore and likely to be paid by the Centre.
The affidavit listed eight categories of loans for waiver of compound interest. These include – MSME loans up to ₹2 crore, education loans up to ₹2 crore, housing loan up to ₹2 crore, consumer durable loans up to ₹2 crore, credit card dues up to ₹2 crore, auto loans up to ₹2 crore, personal loans to professionals up to ₹2 crore and consumption loans up to ₹2 crore.
According to affidavit, full waiver of interest on all the loans and advances to all classes and categories of borrowers for six-months period would cost ₹6-lakh crore. “If the banks were to bear this burden, it would necessarily wipe out a substantial and major part of their net worth, rendering most of the banks unviable and raising a very serious question mark over their very survival,” it said.
Downgrading of NPAs, credit rating
Allaying the apprehension of standard accounts turning NPAs, the affidavit quoted RBI’s announcement about the resolution framework which provides that loan accounts slipping into NPA between invocation and implementation may be upgraded as standard on the date of implementation itself. “Any account becoming non-performing due to the bank’s or any other delay, need not suffer from being labelled as NPA,” it said. It may be noted that the apex court has already made it clear no loan account (standard on August 31) be declared non-performing assets (NPAs) till further order.
There has been an apprehension that credit rating agencies may record a downgrade to NPA for defaults during the moratorium. Here the government quoted SEBI’s circular which specified that in case of restructuring (of loan account), the same may not be considered a default by rating agencies. “In case of any follow up decisions being required, the government would engage with SEBI, for a holistic and humane view in resolving issues,” the affidavit said.