The central government, in an affidavit recorded in the Supreme Court, has upheld forgoing compound interest or 'interest on interest' for small ticket loans up to Rs 2 crore. The help would be accessible to all borrowers, the administration said in the testimony yet didn't explicit the way where alleviation would be given to the individuals who might not have profited the moratorium.

The case identifying with interest on credits under ban, being heard in the Supreme Court currently, has genuine ramifications for the banking sector specifically and the financial solidness of the economy when all is said in done.

Carrying tremendous help to individual and MSME borrowers, Center told the Supreme Court that it would forgo interest on the repayment of loan of up to Rs 2 crore.

The move will provide relief to individual borrowers and medium, small and micro enterprises (MSMEs) during the COVID-19 outbreak.

The compounded interest will be postponed off for the "most vulnerable class of borrowers". These advances incorporate MSME advances, instruction credits, lodging advances, and individual advances, among others, up to the measure of Rs 2 crore.

The Center has emphasized that waiver of all interest on borrowings for the time of moratorium is neither pleasant nor handy, since this would trouble the banks an account with an expected measure of Rs. 6 lakh crore. The affirmation says

In its affidavit, the government said that it has decided to continue the tradition of “handholding” the small borrowers. “The government, therefore, has decided that the relief on waiver of compound interest during the six month moratorium period shall be limited to the most vulnerable category of borrowers”

"The only solution, is that government bear the weight coming about because of waiver if compound interest. This Hon'ble Court would be fulfilled that the government bearing this weight would normally affect a few other squeezing responsibilities being looked by the country including meeting direct expenses related with pandemic management tending to essential needs of the normal and relieving the everyday person's issues emerging out of loss of work."

On the issue of downgrading of credit rating – a concern that was raised by several petitioners during the course of the hearing before the Court – the Centre has said that while a circular on this issue was issued by the SEBI earlier, in case follow-up decisions need to be taken, the government will engage with the SEBI to take a humane and holistic approach.

The RBI had conceded borrowers a six-month freeze on their loan repayments — given the economic impact of the viral closure — which finished on August 31. The middle and the RBI had before told the court that the ban can be reached out by as long as two years.

The government’s decision marks a change from its earlier decision to say no to any interest waiver as it would affect banks. The change of stance is based on the recommendation of a government panel headed by former Comptroller and Auditor General Rajiv Mehrishi, which was tasked with examining the effects of the coronavirus and the lockdown on various sectors.

Banks raise money from depositors and shareholders. Interest waiver would be at their expense. This will seriously erode the confidence of depositors and shareholders. Already interest on bank FDs have fallen below the inflation rate. Negative real returns will drive depositors away from bank deposits. Therefore, waiver of interest on loans should not be attempted at all. A possible way out is the waiver of interest on interest with the government footing the bill. But, this will worsen the already stressed fiscal deficit.