The Centre will waive 'interest on interest' charges on loans up to ₹2 crore for six months through August.
In an affidavit to the Supreme Court, the government said that due to unprecedented conditions "the only solution is for the government to bear the burden of waiving of interest" and that it will seek the Parliament's approval for the decision taken.
The move will benefit thousands of small borrowers and will include those who have cleared their dues. The compound interest will be scrapped for loans taken out for education, housing, credit-card dues, among others, the finance ministry said in the affidavit.
The Reserve Bank of India (RBI) had on 22 May extended moratorium on term loans till 31 August amid the nationwide lockdown due to covid-19. In March, it had allowed a three-month moratorium from paying EMIs and on payment of all term loans due between 1 March and 31 May.
The government has said if charges are waived off for all categories of loans, it would lead to a ₹6 trillion burden for banks. "If the banks were to bear this burden, it would necessarily wipe out a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark on their survival."
On 28 September, the apex court had adjourned the loan moratorium case till 5 October, granting more time to the Centre, the RBI and banks to work together and file a response on their stand on waiving interest charged during the moratorium period.
It had passed an interim direction, on 3 September, holding that accounts not declared as non-performing assets (NPAS) as on 31 August shall not be categorised as suuntil further orders. The interim order was extended on the last date of hearing.
Petitioner Gajendra Sharma, in his plea, had submitted that interest would continue to accrue during the moratorium, which ultimately the borrower would have to pay. He had argued that no interest should be charged during the moratorium because people are facing "extreme hardship".
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