Bringing huge relief to individual and MSME borrowers, Centre told the Supreme Court that it would waive interest on the repayment of loans 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.
In an affidavit, the Centre said it will continue the "tradition of handholding the small borrowers" and has waived compound interest for the period for the most "vulnerable category of borrowers", legal news website LiveLaw reported.
Also read: Banking Central | An 'Aatmanirbhar' interest waiver solution on the cards?
The waiver will be applicable to a number of loans like education loans, housing loans, credit card dues and auto loans, among others.
The Centre also said that it would seek Parliament's permission for grants to enable the move.
The waiver on interest would apply, irrespective of whether the borrower has availed of the moratorium in the categories of loans specified by the government.
The ministry also said that waiving off interest on loans to every category would amount to a burden of Rs 6 lakh crore for banks.
"If the banks were to bear this burden, it would necessarily wipe out a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark on their survival," the ministry said in the affidavit.
The Reserve Bank of India (RBI) allowed borrowers to seek a six-month moratorium on all loans, which the centre and RBI had earlier told the court could be extended by up to two years.
However, banks and finance companies were charging borrowers interest on the principal as well as interest liability, which extended the repayment period by over six months.
The move led to a huge increase in credit card outstanding liabilities which have high interest charges.
Centre's recent position on waiver marks a shift from its earlier decision to say no to any interest waiver as it would affect banks. It has changed its position based on the recommendation of a government panel headed by former Comptroller and Auditor General Rajiv Mehrishi, which was studying the effects of the coronavirus and the lockdown on various sectors.
Banks do not favour extending the loan repayment freeze, as they believe it would drain their finances and provide an opportunity to borrowers who have the capacity to repay to not do so.
The Supreme Court had asked the government to find a solution and not "hide behind the Reserve Bank".
The case would be taken up again on October 5.
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