For the moratorium period in loans up to Rs 2 crores, GOI has decided to waive off the interest on interest. As per the credit rating agency ICRA, this can leave a dent of around Rs 5,000-7,000 crores on the central exchequer. Anil Gupta, the Vice-President of ICRA said that the cost to government due to the waiver would be in the range of Rs 5,000 to 7,000 crores considering that around 30-40% of the overall loans of the NBFCs and the banks would be eligible for the relief. He further added that given the intent of the government to absorb the cost of the waiver on itself, it would mean a minimal effect on the profitability of the lenders in the Indian banking sector. Loans up to Rs 2 crores of the MSME, Personal, housing, educational, auto, credit card dues and consumer durables types are included for which the interest on the interest would be waived off. This step is being brought in with a rider to bring parity between the borrowers who availed moratorium and the ones who did not. A notional amount of interest will be reduced from the principal amount outstanding for the borrowers who did not avail the moratorium. The Finance Ministry has recently stated that the government has decided to carry forward the tradition of handholding the small borrowers and this decision is for taking in the burden of the compound interest for the banks. An estimate by the Macquarie Capital had indicated that the waiving off the total compound interest or the interest on interest during the moratorium period could cost banks almost Rs 15,000 crores.

This declaration comes after the CAG stated in its report that the GOI had flouted rules and laws by retaining Rs 47,272 crores of GST compensation cess to be given to the states. Under the GST Compensation Cess Act, 2017, the compensation cess meant for payment to the states is to be credited to a non-lapsable fund (GST Compensation Cess Fund). The CAG report had stated that since a large chunk of the compensation cess (due for the states) was not paid to the states, it led to an overstatement of revenue receipts and understatement of fiscal deficit. This short-crediting of the GST cess was a violation of the GST act, 2017 which is driving wider the differences between the states and the centre in the GST council meetings. The centre in a way to explain itself out of the seeming allegations of the CAG report had stated that the GST dues (still to a larger extent unpaid for many states) are kept temporarily in the Consolidated Fund of India. But the larger picture hints at a different intention.

After the introduction of GST in India in 2017, the loans (like personal and business) have become costlier. As an example, earlier personal loans used to have a service charge of 15% and after the GST arrived on the Indian financial scene, the rate became 18% under GST. This means that the loans, both personal and business types have become more costly for the borrowers. The deteriorating business environment, which was already mangled prior to the debilitating impacts of the pandemic induced lockdown, has made it tougher for the bankers to get customers to come ahead for loans. The latest move by the GOI hints at paying for the compound interests using the funds out of the basket meant for payments towards state GST compensation cess. It must be noted that the GOI has also stated that it would seek the approval of the parliament to provide grants for the waiver of the compound interests for the loans issued by the banks. Department of Financial Services under the Finance Ministry in the North Block oversees, manages, and controls the functioning of the Banks, Insurance companies, Financial Institutions, and other related entities in India under its declared functions. Any utilization of funds out of the Consolidated Fund of India, in which the unpaid GST dues for the states are parked now as declared by GOI will need the authorization of the parliament. In case, GOI wants to direct some funds from the CFI towards the Department of Financial Services for the payment for the recent announcement of the loan waiver, it can get it done easily, as it did for the recently passed contentious Farm Bills 2020. It definitely looks like GOI is trying to finance the loans and the poor health of the banks using its much-criticized GST regime.