Centre’s decision to waive interest on interest could cost Rs 7,000 crore

Mumbai: The union government’s decision to waive “interest on interest” for the moratorium period on loans upto Rs 2 crore could have an impact of Rs 5,000-7,000 crore on the exchequer estimates rating agency ICRA.

“Assuming not more than 30-40% of the overall loans of the banks and NBFCs will be eligible for relief, the cost to the government should not exceed Rs 5,000-7,000 crore,” said Anil Gupta, Vice President, ICRA. “This is assuming all borrowers are given relief irrespective of they availing the moratorium or not.”

Gupta added that given the intent of the government to absorb the cost of the waiver, there would be minimal impact on profitability of lenders.

To bring in parity between borrower who availed moratorium and one who didn't, a notional amount of interest on interest will need to be reduced from the principal amount outstanding against the borrower who didn't availed moratorium, Gupta said.

An earlier estimate by Macquarie Capital had suggested that waiving off entire interest on interest during the moratorium period could cost banks nearly Rs 15,000 crore.

In its affidavit, the finance ministry said the government has decided to maintain its tradition of handholding small borrowers and bear the burden arising from such waiver of interest on interest, or compound interest, for the banks.

"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," the ministry said.