The Centre had earlier said no to waiving interest.
In a huge reprieve for borrowers, the government has told the Supreme Court that it is ready to waive interest on the repayment of loans of up to Rs 2 crore, frozen by the Reserve Bank of India (RBI) in a six-month moratorium granted because of the coronavirus pandemic.
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.
"Under pandemic conditions, the only solution is for the government to bear the burden of waiving of interest," the government has said in an affidavit submitted on Friday, adding that it will seek parliament's permission for grants to enable the move.
For the categories specified by the government, the waiver on interest will be irrespective of whether the borrower has availed of the moratorium.
But the Finance Ministry says 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," it says.
The ministry said it had decided to help a certain class of borrowers during the unprecedented situation that the country was facing.
The case will be taken up again on Monday.
The RBI had granted borrowers a six-month freeze on their loan repayments -- given the economic impact of the virus shutdown -- which ended on August 31. The centre and the RBI had earlier told the court that the moratorium can be extended by up to two years.
The government's decision marks a change from its earlier decision to say no to any interest waiver as it would affect banks. The change of stance is based on the recommendation of a government panel headed by former Comptroller and Auditor General Rajiv Mehrishi, which was tasked with examining the effects of the coronavirus and the lockdown on various sectors.
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.
The Centre had argued in earlier court hearings that waiving interest on deferred EMIs during the moratorium period would be against "the basic canons of finance" and unfair to those who repaid loans on schedule. But the Supreme Court had made it clear that the government needs to find a solution and not "hide behind the Reserve Bank".
The Supreme Court last week directed the centre to come up with a concrete plan to help borrowers.