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Centre likely to stick to compound Interest waiver for small firms, individuals only 

Finance ministry officials say the bigger players can restructure their debt as per the recent K.V. Kamath committee report. — Anilesh S. Mahajan

The Union finance ministry is unlikely to extend the benefits of the waiver of ‘interest on interest’ levied on loans taken by small firms and individuals to the bigger players who have been demanding a similar reprieve. Sources say the ministry will stick to its stance to waive the compound interest on loans up to Rs 2 crore for consumers who opted for the six-month moratorium announced in March due to the Covid pandemic. The waiver will benefit MSMEs (micro, small and medium enterprises) and individuals who took loans for education, housing, consumer goods and vehicles or to pay off credit card dues.

The Supreme Court had, on October 5, asked finance ministry officials to come up with a blueprint of measures to provide ‘relief’ to borrowers. It is expected that the Centre, along with the Reserve Bank of India (RBI), will issue circulars and orders to implement the interest waiver over the next few days. The court is expected to discuss the matter again on October 13. “The waiver on interest will be irrespective of whether the borrower has availed of the moratorium,” a top finance ministry official said.

In March, the RBI had asked lending institutions, such as banks, NBFCs (non-banking financial companies), microfinance institutions and housing finance companies, to allow consumers to defer their loan instalments. However, they still had to pay the compounded interest for these six months, usually referred to as ‘interest on interest’. This has become a sensitive issue as salaried individuals who lost their jobs or suffered pay cuts were already finding it difficult to repay their loans. In such a situation, the ‘interest on interest’ added to their agony. Along with micro and small enterprises, some of the sectors most impacted by this were real estate and power generating companies.

The RBI’s latest financial stability report notes that about 80 per cent of retail borrowers who had taken loans from public sector banks had availed of the moratorium. For NBFCs and small banks, the figure was 45.9 per cent and 73.2 per cent, respectively. With growth projected to be negative this quarter and the next, and job losses and pay cuts likely to continue, lenders worry that many borrowers will be unable to repay their debt, leaving balance-sheets of the lenders highly stressed. This had led to an urgent conversation over the need for a recapitalisation plan for public and private sector banks.

The waiver of compound interest might bring some relief to consumers but will squeeze banks. Finance ministry officials clarified to INDIA TODAY that the exchequer would bear the burden. This is actually a shift from the finance ministry’s previous stance, as this may impact the health of banks. But the bigger task for the government would be to ensure that the benefit trickles down to consumers of other lending institutions as well.

In the apex court, CREDAI or Confederation of Real Estate Developers’ Associations of India contended that it hasn’t received the offer of benefits. Finance ministry officials say if the entire interest for the moratorium period is waived, the exchequer would have to bear the burden of over Rs 6 lakh crore. They said the bigger players can take the offer of the lending institutions based on the recent K.V. Kamath panel report, which the RBI accepted within 24 hours of tabling. The report has laid down rules on how lenders should evaluate a borrower seeking restructuring of debt. Lenders have been asked to check the credit worthiness of borrowers based on their pre-Covid cash flows, ability to bounce back, and other complex matrices.   

The author is Sr Editor, indiatoday.


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