Home » Personal Finance » Compound Interest Waiver To Kickstart The Festivities – Finance Ministry Issues Guidelines

Compound Interest Waiver To Kickstart The Festivities – Finance Ministry Issues Guidelines

by Tavaga Invest
Compound Interest Waiver

Accepted the moratorium? Partially or fully repaid the interest during the moratorium? Find out if you are eligible for the interest on interest relief.

By: Tavaga Research

The Reserve Bank of India in February announced a loan moratorium on repayment of term loans and credit card dues. The moratorium period was initially three months starting in March. However, the period was extended till September 28, which shaped up to a 7-month moratorium. The relief provided by the moratorium initially was just deferment of loan repayments to a later period. The moratorium would also not affect the credit rating of the borrower.

Initially, the borrower was expected to pay the original loan amount plus the interest incurred during the 7-month period on the original interest amount (also referred to as compound interest).

Citing Covid-19 pandemic stress, the Supreme Court directed the Central Government and the Central Bank to consider interest on interest waiver for the moratorium period. The court’s directive was fueled by several petitions seeking relief of a compound interest waiver. The central government after acknowledging the merit in such a directive has now issued the guidelines for implementation of the scheme.

Guidelines for implementation of interest waiver

  • The scheme will be adopted by banks, non-banking financial corporations (NBFCs) as well as Housing Finance Corporations (HFCs). The scheme is expected to come into effect on November 5
  • The scheme is only applicable to eligible loans accounts for the moratorium period from March 1 to August 31, 2020
  • Only loan accounts with a total outstanding amount (sanctioned limit and aggregate of all facilities availed from the lender) NOT exceeding Rs 2 crores as of February 29 will be eligible for the relief
  • Regardless of full or partial utilization of moratorium on repayment, the eligible borrowers are entitled to the difference between the compound interest and simple interest. Therefore, the lending institutions will credit the difference to the respective accounts
  • The scheme is also made available to those eligible borrowers who did not opt for a moratorium but have still not paid their EMIs. This is a key guideline as the ex-gratia (voluntary) payment will be made to all the borrowers meeting the eligible criteria.
  • Lending institutions are directed to credit the differential amount first and then claim for reimbursement from the Central Government
  • The rate of interest for calculating the interest relief will be the same as that in the loan agreement.

All the lenders are expected to follow a uniform method of functioning in that the lenders will not consider any repayment, partial or full, for the period. Therefore, the differential amount will be calculated and credited for all the eligible loan accounts.

Compound Interest Waiver
Source: Times of India

What type of loans are covered for interest on interest relief?

The following loans are covered under the scheme of compound interest waiver: Credit card outstanding dues, housing mortgages, auto loans, education loans, MSME loans, and consumer loans

The Central Government is to incur an estimated cost of Rs 6,500 crore, which is the amount that will be reimbursed to the lending institutions for waiving the compound interest on loans for the said period.

The decision to limit the eligible accounts seems prudent as the lenders’ financial health will not worsen. On the contrary, to forego interest on interest for all the loan accounts would have cost the banks Rs 6 lakh crores (Source: Financial Express). Taking on such a massive liability would have pushed the banks into a crisis.

Related Posts

Leave a Comment