Impact of Interest Waiver on Six-Month Loan Moratorium

  • The government has set up an expert committee headed by former comptroller and auditor general (CAG) Rajiv Mehrishi to assess the impact of waiving interest and interest on interest on loans during the moratorium offered to Covid-hit borrowers that ended August 31.
  • Asked to submit its report within a week.
  • Supreme Court giving the government until September 28, when the next hearing will take place on petitions related to the moratorium, to clarify its view on waiving interest during the six-month period.
  • Earlier in the day, the court directed banks not to declare any loan as nonperforming asset (NPA), if it hadn’t been categorised as an NPA as of August 31, until further notice.
  • The Reserve Bank of India (RBI) had in March this year allowed banks to offer a three-month moratorium on principal and interest payments beginning March 1 to provide relief to borrowers hit by the Covid-19 pandemic.
  • This was later extended by another three months to August 31.

       Impact on Depositors, Banks

  • The three-member committee has been asked to measure the impact on the national economy and financial stability of waiving interest and interest on interest on such loans.
  • It will also suggest measures to mitigate the financial constraints of various sections of society due to any such decision.
  • The court wants the government to address two issues — whether interest can be charged on interest and whether credit rating agencies can downgrade a business that’s been hit by the pandemic during the moratorium period.
  • Loans can be classified NPA if the overdue period crossed the 90 days threshold after excluding the moratorium period.
  • The government had previously backed the Reserve Bank of India’s stand that interest couldn’t be waived as it would undermine the financial industry and a one-size-fits-all formula couldn’t be applied to all sectors.
  • The Supreme Court had insisted that the government should clarify its own stand on the matter, saying it shouldn’t ignore the plight of borrowers due to the pandemic.
  • The government had rejected a plea for a uniform interest waiver policy, arguing that all loan accounts were different and any relief would be sectoral and on a case-to-case basis.
  • Under the RBI moratorium plan, there can be no waiver of interest during the period. It’s added to the principal amount, translating into interest on interest.
  • The unpaid EMIs of borrowers have been converted into a loan and repayment tenure extended accordingly.