RBI loan moratorium: Centre agrees to "handhold small borrowers", waive compounded interest for loans of up to Rs 2 crore

In its affidavit filed before the Supreme Court, the Central government has said that it will waive compound interest on personal and small loans of up to Rs. 2 crore for the six-month loan moratorium period introduced in light of the COVID-19 pandemic..The compounded interest will be waived off by the Centre for the "most vulnerable class of borrowers". These loans include MSME loans, education loans, housing loans, and personal loans, among others, up to the amount of Rs 2 crore..The Centre has reiterated that waiver of all interest on borrowings for the period of moratorium is neither agreeable nor practical, since this would burden the banks with an estimated amount of Rs. 6 lakh crore. The affidavit says,."If the Banks were to bear this burden, it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the Banks unviable and raising a very serious question mark over their survival."Affidavit filed by Centre.The burden of waiver of compounded interest for a specific class of borrowers would be borne by the government as the only viable solution, the affidavit says. It is added that it is impossible for the banks to bear this burden without passing on the financial implications on to their depositors or affecting their net worth, neither of which is in larger public interest.."The only solution, is that government bear the burden resulting from waiver if compound interest. This Hon'ble Court would be satisfied that the government bearing this burden would naturally have an impact on several other pressing commitments being faced by the nation including meeting direct costs associated with pandemic management addressing basic needs of the common and mitigating the common man's problems arising out of loss of livelihood."Affidavit filed by Centre.Therefore, keeping with the tradition of "handholding small borrowers", the government has decided to grant waiver of compounded interest for borrowers of loans of up to Rs 2 crore, the affidavit states..On the issue of downgrading of credit rating - a concern that was raised by several petitioners during the course of the hearing before the Court - the Centre has said that while a circular on this issue was issued by the SEBI earlier, in case follow-up decisions need to be taken, the government will engage with the SEBI to take a humane and holistic approach..The Supreme Court is scheduled to hear the case next on October 5.