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Government’s Compound Interest Waiver Scheme: How It Will Work

The scheme must be implemented by Nov.5 and will be applicable for loans up to Rs 2 crore in specified categories.

A cashier counts Indian rupee banknotes in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
A cashier counts Indian rupee banknotes in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

The Indian government has issued guidelines to banks for implementing a waiver of compound interest or interest-on-interest for a six-month period between March and August 2020.

The Reserve Bank of India had offered a moratorium on repayments over these six months to help blunt the impact of the Covid-19 crisis but banks continued to accrue compound interest over these months. This was challenged in the Supreme Court. Nudged by the apex court, the government devised a scheme to waive compound interest for loans below Rs 2 crore, irrespective of whether the borrower availed of the moratorium fully, partially or not at all.

Details of the scheme were notified on October 23, with the government asking lenders to implement the scheme by Nov. 5.

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Finance Ministry Issues Guidelines For Implementation Of Interest Waiver On Loans

Who Does The Scheme Apply To?

The scheme is applicable to loans below Rs 2 crore across eight categories identified by the government. The accounts should not have been tagged as non-performing as on Feb. 29, 2020, the notification said.

The categories identified include:

  • MSME loans
  • Education loans
  • Housing loans
  • Consumer durable loans
  • Credit card dues
  • Auto loans
  • Personal loans to professionals
  • Consumption loans

The scheme is applicable across all lending institutions including banks, non-bank finance companies and housing finance companies.

How Will The Amount Due Be Calculated?

The government notification says the amount of relief should be calculated using the difference between simple interest and compound interest.

  • The scheme mandates ex-gratia payment by way of crediting the difference between simple interest and compound interest.
  • Period to be reckoned for computing ex-gratia payment set as March 1, 2020 - Aug. 31, 2020.
  • While making the calculations, repayments in the loan account during the period should be ignored.
  • Rate of interest would be reckoned as the rate in the loan agreement. If the rate changed after Feb. 29, 2020, it shall not be reckoned for the scheme.
  • In the case of credit card dues, the rate of interest shall be the weighted average lending rate charged by the card issuer for transactions financed on an EMI basis between March and August.
  • For cash credit, simple interest will be calculated on a daily basis at the rate as on Feb.29, 2020. Compound interest will be calculated on monthly basis. The difference between the two will be credit to the customer’s account.

Will Scheme Be Applicable To Those Who Didn’t Take The Moratorium?

The government has specified that the scheme will be applicable irrespective of whether a borrower in the specified category took the moratorium fully, partially or did not take it at all.

“While making the calculation, repayments in the loan account during the period to be reckoned will be ignored. This will make the approach of the lending institution uniform for all borrowers, irrespective of whether they have fully availed or partially availed or not availed of the moratorium....” the government notification said.

Who Will Bear The Cost?

The government has specified that it will bear the cost. It is estimated that the scheme will cost the government Rs 6,500 crore.

Lenders have been asked to submit their claims for reimbursement by Dec.15, 2020. These claims should be pre-audited by the statutory auditor of the lending institution.

SBI will act as the nodal agency for the government, both to receive and settle claims.

Lenders have also been asked to set up a grievance redressal for the scheme.

How Easy Will It Be For Banks?

CS Setty, managing director at State Bank of India said that, as per the operational guidelines suggested by the government, the differential between the simple and compounded interest will be adjusted against a borrower's loan account.

SBI already has the necessary information on eligible customers and borrowers do not need to apply for the differential to be credited to them, Setty said. It would automatically adjusted against their loan accounts.

Ashutosh Khajuria, executive director at Federal Bank said that banks have already undertaken an exercise to compute the amount of compounded interest charged to customers between March and August. “So every bank has the necessary information on how much is owed to each customer. We don't feel that there is any major effort needed from banks on this,” he said. Khajuria said that some smaller lenders may not have the technical capability to implement this seamlessly but the number of borrowers will be smaller.