In a big relief to borrowers, the government has decided to waive 'interest‘ on interest for loans during the six-month repayment moratorium period, which ended in August, it informed the Supreme Court on Friday.

While this relief would be available only on loans up to Rs 2 crore, borrowers who paid their EMIs (equated monthly installments) would also benefit. However, borrowers would have to continue paying interest on the principal amount. Only the interest on the accrued interest component during the moratorium would be waived.

The government told the apex court that the move was in line with its "tradition of handholding small borrowers". It added that the centre would bear the burden arising out of this waiver.

The Finance Ministry, in its affidavit, said that the interest waiver would apply to loans availed for education, housing, consumer goods, auto and credit card dues. The waiver would also apply to loans availed by micro and small & medium enterprises (MSMEs).

"Under pandemic conditions, the only solution for the government was to bear the burden of waiving interests," the government said. It will seek Parliament's permission for grants to enable the move.

The decision comes after an expert committee headed by former Comptroller and Auditor General, Rajiv Mehrishi had recommended the waiver. Earlier, the government and the RBI had argued against waiver on the ground that it would be against banks and depositors' interests. It would also be unfair for those who have paid their dues, it had said.

The Finance Ministry said that waiving interest on loans to every category would amount to Rs 6 lakh crore burden 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 added.

For this reason, it said, the government decided to help specific classes of borrowers during the unprecedented situation that the country was facing.

The central bank granted borrowers’ a six-month freeze on loan repayments after the economy was impacted due to the lockdown.