Interest on interest waiver: Is this manageable?

 The Indian government has supported interest charge waiver on interests for loans up to Rs 2
crore in the wake of the distress due to the pandemic. This proposal does seem to benefit the
lower and middle income groups, if approved by the Supreme Court.

 The benefit will be extended for loans availed by Micro, Small and Medium Enterprises
(MSMEs), education loans, credit card dues, housing, auto loans, consumer durables, personal
and professional loans and consumption loans.

 While it is important to provide relief to vulnerable borrowers during uncertain times to further
prevent any negative ripple effects within the banking system, the upper limit of Rs 2 crore does
raise questions on how no two borrowers are the same. For example, the financial profile of a
person who has a huge credit card due is very different from that of one who has taken a huge
loan for running a small business.

 The move also puts the disciplined borrowers who repaid loans on schedule, at a disadvantage as
the waiver has been proposed irrespective of whether the moratorium was opted or not by the
borrowers. This might also cause eroded credit discipline over a period of time.

 The affidavit states that the relief would be provided only to banks. It doesn’t include the Non-
Banking Financial Companies (NBFCs) which also cater to the needs of vulnerable borrowers.
This is contrary to Government’s statement that it has decided to continue with the tradition of
‘handholding’ small borrowers.

 Even though the government will have to bear huge costs associated with this waiver, this move
will protect the borrowers, the banks and ultimately the depositors. The impact of these huge
costs on the economy can be analyzed in two ways:

o The government bearing this huge burden will affect the diversion of resources towards
other commitments such as the direct costs involved in pandemic management and
addressing the basic needs of the citizens hit by the pandemic.

o Another way to look at it could be that a part of the costs associated with subsidies will be
raised through taxes and whether the tax payers should be subsidizing the distressed
borrowers at all even if the taxpayer is also a distressed borrower.

 Keeping the larger national economic interest in mind, the government has stated in its affidavit
that the government bearing all the costs is the only solution. However, the government hasn’t
specified the cost it would be incurring as a result of this waiver.

 The affidavit also stated that the government will not further expand the scope of the waiver.

Reference: https://www.bloombergquint.com/government-for-waiving-interest-on-interest

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