Recently, the Indian Government announced a scheme to waive compound interest for borrowers who opted for a loan moratorium between March 1st, 2020, and August 31st, 2020. This initiative has come as a response to the economic fallout caused by the Covid-19 pandemic. Aimed at providing financial relief to borrowers, the Reserve Bank of India (RBI) first offered a three-month loan moratorium in March 2020, later extending it by another three months up till August 31st, 2020.
Understanding the Compound Interest Waiver Scheme
The compound interest waiver scheme is a government initiative that allows eligible borrowers an ex-gratia payment of the difference between the compound interest and simple interest accrued during the six-month moratorium period. The term ‘ex-gratia payment’ refers to payments made out of moral obligation, not legal obligation.
Unlike simple interest, which is levied only on the principal amount of a loan or deposit, compound interest is levied on the principal amount and the interest that accumulates on it in every period, making this scheme a significant relief effort for borrowers during these testing times.
Eligibility Criteria for the Scheme
This scheme applies to loans availed by Micro, Small, and Medium Enterprises (MSMEs) and also covers retail customer loans for education, housing, consumer durables, and automobiles. To be eligible, a borrower’s aggregate outstanding loan must not exceed Rs. 2 crore across all such loans. Interestingly, credit card dues have also been enveloped within the scope of the scheme.
The waiver applies irrespective of whether the borrower partly, fully, or didn’t avail the moratorium at all. However, only loan accounts not reported as Non-Performing Assets (NPAs) as on February 29th, 2020, are allowed. A loan becomes a non-performing asset (NPA) 90 days after repayments become overdue.
Effects of the Scheme
The amount saved through this loan interest waiver might seem relatively small. This is because the waiver only applies to the interest that would have been charged on the original loan’s interest during the six-month moratorium period. In simpler terms, loan repayments will continue, and borrowers will still need to pay the simple interest they would have paid if they hadn’t opted for the loan moratorium. It is only the compounding interest that gets waived off.
Implementing the Scheme
Lenders are required to establish a grievance redressal mechanism for eligible borrowers under the scheme by October 30th, 2020. Moreover, a system has been set up for lenders to claim back the amount from the government. Lenders must submit claims for reimbursement by December 15th, 2020, through a special cell established at the State Bank of India (SBI).
This initiative is expected to provide much-needed relief to affected borrowers during the turbulent economic condition caused by the ongoing pandemic.
(Source: TH)
