India will subsidize interest costs for small borrowers who had availed of a six-month loan repayment holiday to survive as the pandemic devastated cash flows, according to court documents seen by Bloomberg.
Prime Minister Narendra Modi’s government will pay the “interest on interest” on loans of as much as 20 million rupees ($273,000) for the duration of the Reserve Bank of India-authorized moratorium that ended on Aug. 31, according to an affidavit filed by the Ministry of Finance in the Supreme Court on Friday. A spokesman for the ministry declined to comment. Banks and housing finance companies have been imposing charges on both the principal and the interest, which translated into repayment periods being extended by more than six months.
India’s banks — already weakened by a two-year-old shadow lending crisis — are seeking more guidance from the regulator on how to battle one of the world’s worst bad loan ratios.
The proposed plan will benefit small borrowers, and will include those who have cleared their dues, for a range of loans made between March and August, according to the court filing.
The government’s pledge was earlier reported by the Times of India.
The compound interest will be scrapped for loans taken out for purposes including education, housing and credit-card dues, according to the document.
In its affidavit, the government also said it will consult India’s market regulator — the Securities Exchange Board of India — on whether companies can be given relief on credit rating downgrades for the moratorium period.