From March itself, the eyes of the corporate sector have been on the Reserve Bank of India to see the reliefs that can be granted to them for the loans they had availed. The relief came in the nature of moratorium for three months which was further extended and ultimately followed by certain additional prudential measures for restructured accounts. In light of this, the case of Gajendra Sharma v. Union of India & Anr. before the Supreme Court has garnered significant interest, where a waiver on the interest has been sought, as opposed to just a moratorium. The Central Government has stated in its affidavit before the Supreme Court that it is willing to waive off compounded interest for loans up to Rs. 2 Crore for the moratorium period for identified categories of borrowers. This waiver specifically aims to provide relief to the most vulnerable category of borrowers, such as the MSME sector, personal loans, home loans, automobile loans, education loans, small retail borrowers, etc. It is pertinent to note that while the eligible borrowers will continue repaying contractual interest on the outstanding loan, the waiver stipulates that the interest component will not be added to the principal outstanding. Given that the compounded interest often constitutes a good part of the loan repayments, waiver of such interest is likely to bring relief to those who had availed the moratorium.

Given that the intention of the relief is only for those borrowers affected / impacted by the moratorium, it is unlikely that the borrowers who had opted out of the moratorium would get any benefit of such waiver. Banks and financial institutions have been firmly opposing waiver of compounded interest. Given the nature of business for a bank, this relief could significantly impact their ability to pay interest on term deposits and could also lead to them increasing their rate of interest across the board for certain facilities. However, at the end of the day, there are no free lunches and it is likely that the Government may have to compensate such lenders for waiver of such interest through a suitable relief package. Reports suggest that around 25-40% of the borrower accounts of the lending institutions would be eligible for the relief and the cost to the Government could lie somewhere between Rs. 5,000-6,000 crore.

Contributed by: Veena Sivaramakrishnan, Partner; Pratik Datta, Associate

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