Need to transpose data in SQL server 2008. How do you achieve this?

My first thought with this was to introduce a second CTE to assign the groupings to the rows and therefore make it easier to use a GROUP BY. E.g.

DECLARE @ZMONTH INT = 5
DECLARE @ZYEAR  INT = 2015

;with cte as
(
		SELECT  CAST((INT_ARREARS+PRIN_ARREARS)/DEDUCT AS INT) as COMPS ,
		        INT_ARREARS+PRIN_ARREARS AS TOTS,
		        IDNO,AC_BALANCE,LOANNUMBER,CUSTOMER
		 FROM HLOANS 
		 where DEDUCT >0 and INT_ARREARS+PRIN_ARREARS>0 
		 AND CAST((INT_ARREARS+PRIN_ARREARS)/DEDUCT AS INT) >0
		 AND CMONTH=@ZMONTH AND CYEAR=@ZYEAR

), cte2 as   -- This CTE is just to get the grouping in place
(
	SELECT	 	CUSTOMER, AC_BALANCE,
		  CASE WHEN COMPS BETWEEN 1 AND 3 THEN CAST('1-3' AS Varchar(8))
			   WHEN COMPS BETWEEN 4 AND 6 THEN '4-6'
			ELSE 'The Rest' END AS [Grouping],
		    TOTS
	FROM cte
)
-- This query is to get the actual data required
SELECT CUSTOMER, SUM(AC_BALANCE) as [LOAN BALANCE], [Grouping], 
SUM(TOTS) AS TOTS, 
OLEM = CASE WHEN [Grouping] = '1-3' THEN SUM(TOTS) ELSE 0.0 END,
[SUB-STANDARD] = CASE WHEN [Grouping] = '4-6'  THEN SUM(TOTS) ELSE 0.0 END
FROM cte2
GROUP BY CUSTOMER, [Grouping]
ORDER BY [Grouping]

An alternative approach would be to have the groupings in a separate table which can then be part of a simple JOIN. I've used a TABLE variable here but it could just as easily be a temporary table or even a permanent table on the database.

DECLARE @ZMONTH INT = 5
DECLARE @ZYEAR  INT = 2015

DECLARE @Groupings TABLE (comp int, title varchar(30))
DECLARE @maxComp int = (select CAST(MAX((INT_ARREARS+PRIN_ARREARS)/DEDUCT) AS INT) FROM HLOANS)
;WITH q AS
(
    SELECT  1 AS num
    UNION ALL
    SELECT  num + 1
    FROM    q
    WHERE num < @maxComp
)
INSERT INTO @Groupings
SELECT  num, CASE WHEN num BETWEEN 1 AND 3 THEN CAST('1-3' AS Varchar(8))
			   WHEN num BETWEEN 4 AND 6 THEN '4-6'
			ELSE 'The Rest' END AS [Grouping]
FROM  q

;with cte as
(
		SELECT  CAST((INT_ARREARS+PRIN_ARREARS)/DEDUCT AS INT) as COMPS ,
		        INT_ARREARS+PRIN_ARREARS AS TOTS,
		        IDNO,AC_BALANCE,LOANNUMBER,CUSTOMER
		 FROM HLOANS 
		 where DEDUCT >0 and INT_ARREARS+PRIN_ARREARS>0 
		 AND CAST((INT_ARREARS+PRIN_ARREARS)/DEDUCT AS INT) >0
		 AND CMONTH=@ZMONTH AND CYEAR=@ZYEAR

)
SELECT CUSTOMER, SUM(AC_BALANCE) as [LOAN BALANCE], g.title AS [Grouping], 
SUM(TOTS) AS TOTS, 
OLEM = CASE WHEN G.[title] = '1-3' THEN SUM(TOTS) ELSE 0.0 END,
[SUB-STANDARD] = CASE WHEN G.title= '4-6'  THEN SUM(TOTS) ELSE 0.0 END
FROM cte
INNER JOIN @Groupings G ON cte.COMPS = g.comp
GROUP BY CUSTOMER, G.title
ORDER BY G.title

The first bit (q) is a recursive CTE that just generates the numbers 1 through to the maximum possible value of COMP and gives each of those numbers the title of the grouping that it falls into. My test data produced

num     title
1	1-3
2	1-3
3	1-3
4	4-6
5	4-6

The rest of the query is more or less the same as your original query but with a straight-forward JOIN to that list of numbers. It's then very easy to GROUP by the title from the temporary table rather than having CASE statements in the GROUP BY and ORDER BY clauses.

This should run a little faster than the alternative as all of the character handling has been taken out of the main query and is only "calculated" once per possible value.