No Compound Interest during moratorium, says government - relief for borrowers

No Compound Interest during moratorium, says government - relief for borrowers

Relief for borrowers could lead to a burden of Rs 6 trillion on banks if charges are waived off for all categories of loans, says Finance Ministry
No Compound Interest during moratorium, says government - relief for borrowers
Government support to banks and ultimately end customers could his pandemic relief services

In what could be called a relied to thousands of small borrowers, the government has announced waiving of interest on interest (Compound Interest) during the moratorium period for loans less than Rs 2 Crore for six months till August 31 2020.

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".

The announcement said that compound interest for borrowers from eight sectors, viz. micro, small and medium enterprises, credit card dues, education loans, consumer durables, housing, auto loans, consumption loans and personal and professional loans will be waived off for the moratorium period announced earlier as relief measures during the COVID pandemic. This also included those who have cleared their dues.

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 finance ministry, in its affidavit to the Supreme Court said that since the net worth of banks could be hit by this decision, the only solution is, for the government to bear the burden of the interest waiver.

However, this cost, if borne by the government, would necessarily hit other critical and immediate costs related to meeting the costs associated with managing the pandemic, taking care of the common man whose livelihood has been hit, among other critical services, which are already bearing the burden of the immense requirements due to the pandemic. The immediate impact of the waiver on government finances is yet not known, and the finance ministry is set to seek the Parliament’s approval for additional funds, in the winter session.

Source: Media Reports

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