Center ready to waive interest on interest

The center informed the Supreme Court that it manifested to relinquish “interest on interest” on the loan of up to Rs 2crore for the duration of 6 months repayment prohibition by giving benefit to those who clear their loan between March and August.

In its official report, the finance ministry has mentioned that the government has decided to maintain its tradition of handholding small borrowers and bear the burden emerge from such a waiver of interest on interest or compound interest for the banks. In case the compound interest of borrowers is waived, then it would be MSME loan and personal loans up to 2 crores of the category include Housing loans, credit cards, auto loans, personal loans, MSME loans.

The RBI had authorized borrowers to look up for six- month halt on all the loans but banks and housing finance companies will charge interest on the entire amount, including the principals as well as interest liability, which will translate as repayment interval expanding by over six months, the liability was higher for recent loans as the interest component is normally front end loader, aside from this there was a huge growth in liability of the outstanding on credit cards which usually come with high-interest rates.

Photo credit: The Indian Express

Bankers said, the total cost of interest on interest waiver, on condition of benefit confinement to these categories, would be about Rs 5000 crore- Rs 6000 crore. Still, if the schemes get extended to all borrowers then the collective cost of waiver would be between Rs10,000 crore- Rs15,000 crore, in addition to these bankers, are expecting form the government to expiate interest waiver as it is a social welfare measure.

The process of benefit for the category of people whose payment reference is via EMIs or Credit card dues during the delaying interval was not known immediately.

The center has reserved its policy by following the recommendation of an expert committee, as earlier, the center and RBI went through a clash on the issue against waivering of interest on interest on the grounds, as it may account as against the interest of another shareholder mainly of depositors hence it would be unfair to the people who have paid their dues.

Though TOI reported that, a bench of justices Ashok Bhushan, R S Reddy, and M R shah had been influencing the government to “consider and reconsider” it’s the decision to not waive interest on interest.

Anyway, it had flashed to accept the government’s decision to not waive interest altogether.

The further center stated that waiving of interest on interest for all categories of borrowers would turn out into a very enduring and notable financial burden on various categories of banks, which will become difficult to resist the financial burden. Eventually, this will affect the depositor’s interest, therefore, the government decided not to waive for big borrowers, and decided to give relief on waiver of compound interest during the 6-month delaying interval will be restricted to the most vulnerable category of borrowers.

Earlier, the RBI and the center had some clashes regarding the delaying was only postponing loan installments that do did not mean waiving either interest or the amount due during the 6 month period or interest on the interest happened during that interval.

Later on, they said borrowers have understood the difference between the waiver in the interest on the loan and the deferment of payment of installments for that hence due to this “a majority of the borrowers have in fact not taken the benefit of the moratorium”, also if the government has to consider waiver of interest on every type of loans to various categories of borrowers parallel to the 6-month interval for which delaying of payment of installments was not available under RBI circulars and ministry highlighted the waived amount would be more than Rs 6 lakh crore.

Lastly, Minister added hence in this situation of bearing the burden of loans net worth of the bank would be wiped out and this was the reason the waiver of interest was not even contemplated and only payments if installments were deferred.

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