New Delhi: In a relief to the borrowers, the Centre today said that it will waive 'interest on interest' charges on loans up to ₹2 crores for six months through August.

In an affidavit to the Supreme Court, the government said that due to unprecedented conditions "the only solution is for the government to bear the burden of waiving of interest" and that it will seek the Parliament's approval for the decision taken.

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The move will benefit thousands of small borrowers and will include those who have cleared their dues. The interest waiver will apply for loans taken by MSMEs (Micro, Small and Medium Enterprises), for educational, housing, consumer goods, and auto loans and for credit card dues.

The Reserve Bank of India had allowed borrowers to seek a six-month moratorium on all loans due to the economic impact of the coronavirus crisis, but banks and finance companies charged interest on the entire amount: the interest as well as the interest liability.

The Reserve Bank of India (RBI) bank had on 22 May extended a moratorium on term loans till 31 August amid the nationwide lockdown due to COVID-19. In March, it had allowed a three-month moratorium from paying EMIs and on payment of all term loans due between 1 March and 31 May.

The government has said if charges are waived off for all categories of loans, it would lead to a ₹6 trillion burden 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."

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Banks are against extending the loan repayment freeze as they see it as a strain on their finances and an opportunity for even borrowers who have the capacity to repay to withhold payments.

Agra optician Gajendra Sharma, in a plea before the Supreme Court, has demanded the waiver of interest charged by banks on the installments deferred for repayment by the Reserve Bank of India through moratorium. Industry associations have joined the cause with the original petition, demanding the waiver of interest, or waiver of interest on interest, on the suspended monthly installments.

A government-appointed committee has given its recommendations on the impact of waiving interest and interest on interest on the national economy and financial stability. The Indian Banks’ Association (IBA) told the committee that instead of a waiver, it may ask the government to provide relief to borrowers.