The Indian government has announced the waiver of Interest-On-Interest (or Compound) interest during the loan moratorium period of 6 months. We shall discuss this in this post.
Do you remember the 6-months loan moratorium announced by the Indian government from 1st March 2020 to 30th August 2020? If not, do read this and this.
But just to refresh your memories, the Indian government (via RBI) had granted loan moratorium on loans for a period of 6 months to help borrowers and businesses. The moratorium wasn’t about EMI waiver or anything like that. It was just a deferment of the EMI payments. And during the period of deferment, the lenders would have continued to charge interest on interest, i.e. the compound interest would have continued to be charged on the deferred EMIs. Read this detailed post on How Moratorium increases interest and tenure of loan?
The government of India has now decided to waive the interest on interest (compound interest) on the outstanding loans of up to Rs 2 crore during the 6-month moratorium period.
The borrowers will receive the payment of the difference amount between compound interest and simple interest (interest on interest) for 6 months from 1st March to 30 August 2020. Put simply, this means that for the said period of 6 months, the borrowers will only have to pay simple interest on the loan. Any excess compound interest paid would be refunded to them.
And as far as the categories of loans is concerned, all loans of up to Rs 2 crore like home loans, education loans, consumer durable loans, car loans, personal loans, loans to MSMEs, etc. will benefit from this.
But not everyone opted for the moratorium facility. But irrespective of whether or not a borrower availed the moratorium, they would still be eligible to receive the difference between compound interest and simple interest on their outstanding loans.
Ideally, any such waiver of interest should be borne by the lenders. But the government realized that it was next to impossible for the banks to bear this burden in the current context. And hence, the burden compound interest waiver will be borne by the government and not be the banks or the borrowers. This seemingly has been done with the larger public interest in mind. For the rate of interest for this calculation, “the rate of interest (used) would be as prevailing on 29 February 2020 and in case the rate of interest has changed thereafter, it shall not be reckoned for the purpose of his computation.”
To put this very simply, the means that the difference between compound interest and simple interest for the period March to August 2020 will be refunded to the borrowers.
The difference is expected to be paid back to the borrowers account by 5th November 2020.
So that is about the interest on interest waiver on loan moratorium scheme. For small loan amounts, it seems that the benefit will be negligible to say the least. But nevertheless, it’s a small benefit for the borrowers.
And the borrowers are not required to apply for availing this interest-on-interest scheme of government. From what can be made out from the announcement, the lenders will credit the ex-gratia amount into the respective loan accounts of the eligible borrowers.
Also note that due to the manner in which loan EMI schedule is structured by the banks, the lenders at the early stage of repayment cycle will benefit more than those who are nearing completion of their loan repayments.
The finance ministry later on issued a set of 20 FAQs as clarifications on this Interest on interest waiver on loan moratorium (2020 India) – (link to download). If you are interested, you can go through them below:
Q: What is the ex gratia payment to the borrower under the scheme announced by GoI?
A: The bank/ lending institution will provide ex gratia payment to the borrower account of the difference between compound interest and simple interest on loan accounts with sanctioned limits and outstanding up to Rs. 2 crores (aggregate of all the borrowings / facilities from all the banks and financial institutions) for the period from 1st March 2020 to 31st August 2020 (6 months / 184 days).
Q: What are the main features of the ex gratia to borrowers scheme?
A: The main features / highlights of the scheme are: i) Loan accounts with sanctioned limits and outstanding not exceeding Rs.2 crores (aggregate of all facilities with all the lending institutions) as on 29.02.2020. ii) Loan accounts should be standard in the books of the lending institutions as on 29.02.2020. iii) The relief shall cover the following segments – MSME Loans, Education loans, Housing Loans, Consumer Durable Loans, Credit Card Dues, automobile loans, personal loans to professionals and Consumption loans. iv) The period reckoned for refund shall be from 1st March 2020 to 31st August 2020, i.e. 6 months period / 184 days.
Q: Do I have to apply for the relief?
A: No. The ex gratia relief will be credited to the account of all eligible borrowers without any requirement to apply.
A: Who will finalise the list of eligible accounts?
A: Individual banks/ lending institutions will finalise the list of eligible borrower for the relief based on the GoI guidelines.
Q: How will the lending institution assess whether a borrower has aggregate loan facilities up to Rs.2.00 cr from the banking system?
A: Lending institutions are to assess this on the basis of information available with them as well as information accessible from credit bureaus.
Q: Will my Non-Fund Based Limits as on 29.02.2020 be included for arriving at the eligibility amount of up to Rs.2 crore?
A: No. Non-fund based limits will not be included for arriving at the eligibility.
Q: Whether Accounts categorised as SMA-0, SMA-1 and SMA-2 are eligible to avail the benefit of the package?
A: Yes, the accounts classified as SMA-0, SMA-1 and SMA-2 as on 29th Feb 2020 are eligible for the relief package.
Q: Are NPA accounts eligible for the relief package?
A: No. The loan should not be a “Non-Performing Asset (NPA) as on 29.02.2020.
Q: Whether borrowers who have opted for deferment of Interest and Instalment under the RBI COVID 19 relief package earlier are eligible to avail the benefit under the above relief?
A: Yes. The package will be available for eligible borrowers irrespective of whether they have availed or partially availed or not availed the moratorium on repayment announced by RBI vide DOR. No. BP.BC.47/21.04.048/2019-20 dated 27.03.2020 and extended on 23.05.2020.
Q: Whether “partly disbursed loans” are covered under the relief package?
A: Yes, provided that the sanctioned and outstanding amounts do not exceed Rs. 2 Cr. The outstanding as on 29.02.2020 shall be the reference amount for calculating the differential interest amount.
Q: Can a borrower who has closed the loan account/s between 1st March 2020 and 31st August 2020 avail the benefit of the scheme?
A: Yes. Such borrowers are eligible for refund of differential interest from 1st March 2020 up to the date of closure of account (not later than 31st August 2020).
Q: In which of my accounts will the differential amount be credited?
A: The differential amount will be credited to the respective loan account(s).
Q: If I have already closed my loan account after March 1st 2020, how will the differential amount be paid to me?
A: It will be credited to your savings/ current account and if you do not maintain any such account with the lending institution, you can advise the lending institution the details of the account in other banks where the amount can be credited /remitted to.
Q: Which Rate of Interest (%) shall be considered for calculating the package, i.e. RoI (%) considered at the time of sanction or RoI (%) as on 29.02.2020?
A: In respect of Education loans, Housing loans, Automobile loans, Personal loans to professionals and Consumption loans, the rate of interest to be applied for calculating the differential interest component shall be the contracted rate as specified in loan agreements/ documentation applicable as on 29th February 2020.
In respect of consumer durable loans, the rate of interest to be applied for calculating the differential interest component shall be the contracted rate as specified in loan agreements/ documentation. In case where no interest is being charged on equated monthly instalments for a specified period, for the purpose of relief, interest may be applied at MCLR/ Base rate as the case may be.
MSME: · In respect of term loans / Demand Loan, the rate of interest for the purpose of calculating the differential will be the contracted rate as specified in the loan agreements/ documentation applicable as on 29th February 2020. · In respect of Cash Credit/ Overdraft, the rate of interest for the purpose of calculating the differential shall be the rate of interest prevailing as on 29.02.2020.
Credit Cards · Eligibility: The Credit Card outstanding (i.e. settled amount) in the account as on 29.02.2020 will be the reference amount. Any debits / credits which are not reflected in the account will not be eligible/ will be excluded. · RoI (%): The rate of interest shall be the Weighted Average Lending Rate (WALR) charged by the card issuers for transactions financed on EMI basis from its customers during the period from 1st March 2020 to 31st August 2020. (More on Credit card moratorium)
Q: Will I be eligible for relief if my credit card balance is in “Credit” as on 29.02.2020?
A: No. Ex-gratia will not be paid on those credit cards where balance is in “credit” as on 29.02.2020.
Q: What will be the treatment of penal interest/ penalties while arriving at the rate of interest?
A: The contracted rate / interest rate prevailing as on 29.02.2020 which is considered for calculating the interest differential will exclude any penalties or any penal rate of interest applied in the account.
Q: What will be the treatment for the repayments / credits made in term loan/ demand loan during the period from 1st March 2020 to 31st August 2020?
A: The outstanding as on 29.02.2020 will be the reference amount for calculating the differential. Any repayment / credits subsequent from 01.03.2020 – 31.08.2020 shall be ignored for the purpose of calculation.
Q: How will the interest be calculated for cash credit/ overdraft accounts?
A: Simple interest for the period will be calculated based on daily outstanding as at end of the day at rate of interest prevailing as on 29.02.2020. Compounding of interest shall be at monthly rests.
Q: How can I flag my grievances related to the relief package?
A: The borrowers shall register his/her grievance through the link available in the lending institutions’ official site or visit the home branch and submit his / her grievance.
Q: A salaried employee / self-employed professional had availed of a personal loan from the bank which has some amount outstanding as on 29th February 2020. Is the loan eligible for ex-gratia payment under the scheme?
A: Yes. Loans for consumption purposes (e.g., social ceremonies, etc.) are also eligible for coverage under the scheme, besides other specified categories of loans like consumer durables, automobiles, education, credit card dues, housing and personal loans to professionals. However, loans against fixed deposits [including Foreign Currency Non-Resident (Bank) {(FCNR(B)} account, bonds and other interest-bearing instruments], and shares etc., and loans given for investment in financial assets (shares, debentures etc.) are not eligible for coverage under the scheme.