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Centre agrees to waive compound interest on loans during moratorium

New Delhi: The Centre on Friday informed the Supreme Court that it has decided to waive “interest on interest” on loans up to Rs 2 crore during the six-month moratorium period, giving a big relief to retail and MSME borrowers. Those who have cleared their loan dues during the moratorium between March and August will also get the benefit, the Times of India mentioned in a report.

In its affidavit, the finance ministry mentioned the government has decided to maintain its tradition of handholding small borrowers and bear the burden arising from such waiver of interest on interest for the banks. “This category of borrowers, in whose case the compound interest will be waived, would be MSME loans and personal loans up to Rs 2 crore of the following category — MSME loans, educational loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professionals and consumption loans,” the ToI report quoted the ministry as saying.


According to bankers, the cost of interest on interest waiver on the above-mentioned categories of borrowers will be to the tune of Rs 5,000-Rs 6,000 crore. The government is likely to compensate banks for such interest waiver. However, the modalities of how the benefit would flow to those paying their EMIs and credit card dues during the moratorium were not immediately known.

According to the daily, Centre’s decision follows the recommendations of an expert committee headed by former Comptroller & Auditor General Rajiv Mehrishi. Earlier, the Centre and the RBI had argued against waiver of interest on interest on the grounds that it would be against the interests of other stakeholders, especially depositors, and would be unfair to those who have paid their dues.

The SC bench consisting of Justice Ashok Bhushan, R S Reddy and M R Shah had been impressing upon the government to “consider and reconsider” its decision to not waive interest on interest. However, it had appeared to accept the government’s decision to not waive interest altogether. The Centre said waiving of interest on interest for all categories of borrowers would result in a very substantial financial burden on several categories of banks, which would find it impossible to withstand the burden.

“The government, therefore, decided that the relief on waiver of compound interest during the six-month moratorium period shall be limited to the most vulnerable category of borrowers,” the publication quoted the ministry as saying. This would mean loans up to Rs 2 crore.