India pledges to pay interest for small debtors hurt by lockdown

New Delhi: 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.

With the latest pledge, Modi is attempting to provide relief to small borrowers after he suddenly imposed a lockdown that brought business activity to a grinding halt. That resulted in Asia’s third-largest economy contracting 24% in the quarter ended June. Central bank Governor Shaktikanta Das, who has pumped in billions to support banks and shadow lenders, has flagged his growing concerns about the health of the nation’s fragile banking system and as a result of the pandemic and loan holidays.

Banks will have to forgo 6 trillion rupees if interest on all loans are waived off, according to the government’s affidavit. That will wipe out a substantial part of lenders’ net worth and could raise questions on their survival, it said.

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.