Stress buster: Interest relief to cost govt just Rs 6,500 crore

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October 14, 2020 8:00 AM

Under the RBI’s special window, lenders are allowed to recast stressed retail and corporate loans without classifying them as non-performing, provided that they set aside 10% provisions on such advances.

This indicates the prudence observed by the Centre in limiting the relief to the most vulnerable sections of the borrowers, despite persuasive comments from the Supreme Court to broaden the relief net.This indicates the prudence observed by the Centre in limiting the relief to the most vulnerable sections of the borrowers, despite persuasive comments from the Supreme Court to broaden the relief net.

A proposed waiver of the compounding interest on loans up to Rs 2 crore for the specified borrowers, including individuals and small businesses, during the six-month repayment moratorium will cost the Centre about Rs 6,500 crore, a top government source said on Tuesday.

This indicates the prudence observed by the Centre in limiting the relief to the most vulnerable sections of the borrowers, despite persuasive comments from the Supreme Court to broaden the relief net.

The government is yet to decide on whether to appeal against the Vodafone arbitration award but it can’t let it go without examination, the source said.

Extending the interest relief to “all types of loans for all categories of borrowers” would cause a huge burden of Rs 6 lakh crore on banks, likely wiping out a major part of their net worth and even rendering most of them unviable, the government had said in an affidavit in the apex court.

The court is likely to pronounce its order on Tuesday.

The government has already said it sees no possibility of giving any further broad-based debt relief.

The breather already proposed by it to soften the Covid-19 blow is adequate enough, it feels. The apex court had observed that the Centre’s offer to waive the interest on interest on loans up to Rs 2 crore was “not satisfactory”.

A day after the government rolled out measures to create additional demand of Rs 1 lakh crore in the economy in FY21, the official said the Centre is open to extending further stimulus, if required.

Monday’s announcements may cost the government about Rs 40,000 crore from the Budget, or a tenth of the amount to be saved via expenditure controls already declared.

Vodafone Group last month won an arbitration case against the Indian government relating to retrospective taxation under which the income tax department had raised a demand of around Rs 22,000 crore on the British telecom major.

Ruling in favour of Vodafone Group, the Permanent Court of Arbitration in Hague stated that the Indian tax department’s conduct of imposing a tax liability along with interest and penalties was in breach of guarantee of fair and equitable treatment of the terms laid out in the bilateral investment treaty (BIT) between the Netherlands and India. However, the government source asserted that BITs are meant to only protect investments and they can’t override the country’s sovereign right over taxation.

As for the relief to borrowers on the interest on interest, the Supreme Court had earlier asked the government and the central bank to place on record the actions taken on KV Kamath committee’s report on debt restructuring. It also urged both to consider the relevant “issues raised by the real estate associations and power producers”.

The government, for its part, has reiterated that the banks are fully empowered to resolve Covid-19 related stress and customise reliefs to individual borrowers, other than big borrowers, through grant of various concessions/reliefs, in terms of alteration in the interest rate or by taking haircuts.

Under the RBI’s special window, lenders are allowed to recast stressed retail and corporate loans without classifying them as non-performing, provided that they set aside 10% provisions on such advances.

In the affidavit, the finance ministry told the apex court: “This category of borrowers, in whose case the compound interest will be waived, would be MSME loans and personal loans up to Rs 2 crore of the following category — MSME loans, educational loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professionals and consumption loans.”

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