(Bloomberg) — India’s top court asked the government and banks how they plan to waive deferred interest on loans for small borrowers and whether similar relief measures could be provided to other sectors.
The Supreme Court on Monday asked lawyers from the government and Reserve Bank of India to submit information on the measures they plan to take on waiving some of the interest and recasting loans for stressed borrowers. The court will listen to this feedback on Oct. 13.
Prime Minister Narendra Modi’s government will pay the “interest on interest” on loans of as much as 20 million rupees ($273,000) for the duration of the Reserve Bank of India-authorized repayment holiday that ended on Aug. 31, according to an affidavit filed by the Ministry of Finance in the Supreme Court on Friday.
Groups of borrowers, including industry bodies for real estate and power producers, have approached the top court seeking a waiver on compounded interest and an extension of the repayment holiday.
Banks and home finance companies have been imposing charges on both the principal and the interest, which translated into repayment periods being extended by more than six months.
The waiver comes after the Supreme Court asked the Modi administration to assess the impact of the coronavirus pandemic on the economy and come up with proposals for relief measures.
The Reserve Bank of India has taken a number of unprecedented steps to help borrowers facing a cash crunch after the world’s strictest lockdown shuttered businesses and left millions jobless. The moratorium, however, allowed lenders to impose additional interest over the repayment holiday. Subsequently, the RBI allowed banks to restructure loans without having to classify them as non-performing for the next two years.
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India’s main banking gauge was trading up 1.5% at 12:55 p.m. in Mumbai on Monday.
The government’s decision to pay the compounded interest “comes as a relief,” said Abhimanyu Sofat, head of research at Mumbai-based IIFL Securities Ltd. The uncertainty on the issue was like a “hanging sword for lenders.”
Banks will have to forgo 6 trillion rupees if interest on all loans are waived off, according to the government’s affidavit. That will wipe out a substantial part of lenders’ net worth and could raise questions on their survival, it said.
India’s banks — already weakened by a two-year-old shadow lending crisis — are seeking more guidance from the regulator on how to battle one of the world’s worst bad loan ratios.
The proposed plan will benefit small borrowers, and will include those who have cleared their dues, for a range of loans made between March and August, according to the court filing. The compound interest will be scrapped for loans taken out for purposes including education, housing and credit-card dues, according to the document.
In its affidavit, the government also said it will consult India’s market regulator — the Securities Exchange Board of India — on whether companies can be given relief on credit rating downgrades for the moratorium period.
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