Interest on interest’ waiver: What you need to know

Before the festive season was to begin, the government announced an interest on interest waiver scheme to help small borrowers facing adverse economic

Before the festive season was to begin, the government announced an interest on interest waiver scheme to help small borrowers facing adverse economic impact of the pandemic. As part of the interest waiver scheme, the union ministry of finance made an announcement to waive the interest on certain categories of loans, having outstanding amounts less than Rs 2 crore as on February 29, 2020. The ministry’s announcement of the scheme was made in the light of a Supreme Court ruling made on October 14, 2020.  Underlining that the common citizen’s Diwali was in the hands of the government, the apex court had directed the centre to implement – within a short time – the interest waiver scheme on loans up to Rs 2 crore as part of the Reserve Bank of India’s moratorium on loans. The finance ministry also directed the financial institutions, including banks and Non-Banking Finance Companies (NBFCs) to ensure that the scheme was implemented by November 5, 2020. Subsequently, all lending institutions started the process of making refunds.

Understanding interest on interest waiver scheme :

  • Earlier, the central bank had announced a moratorium for all borrowers because of the pandemic and the subsequent lockdowns. The moratorium period was announced on March 1, and then extended till August 31. The borrowers, who had availed the six month moratorium, however, were required to pay personal loan interest for the entire period. But as the Supreme Court intervened and directed the government to waive-off the interest, the union government announced the interest on interest waiver scheme. The scheme provides for an ex-gratia payment of the difference between simple interest and compound interest for six months.
  • You must keep in mind that if you have availed any category of loans, the financial institution will charge compound interest along with simple interest. As part of the interest waiver scheme, financial institutions have to reimburse the difference between compound interest and simple interest for the six month period between March 1, 2020 and August 31, 2020, to all eligible borrowers. Another key highlight of this scheme was that such refunds were to be made to all eligible borrowers, regardless of the borrower having availed the moratorium or not.
  • You are also not required to apply separately for this scheme, and the lending institutions will directly credit the ex-gratia payment in your account. If your loan account was closed before November 5, 2020, then the differential amount will be credited in your savings/current account.
  • The lending institutions, after completing the process of making refunds, can claim reimbursement from the union government. This scheme is likely to cost the central exchequer an amount of around Rs 6,500 crore.

Calculation of the refund on the interest waiver scheme : The difference between the simple and compound interest was to be calculated on the basis of prevailing interest rate as on February 29, 2020. Let’s understand the refund process with the help of an example. Suppose you had taken a loan, where the outstanding amount was Rs 10 lakh with an interest rate of 8%. Now for the six-month period, your total interest will be Rs 40,672 – of which Rs 40,000 is simple interest, and Rs 672 is compound interest. After the government’s announcement, the differential amount of Rs 672 will be reimbursed in your loan account or savings/current account.

Eligibility for the interest on interest waiver scheme: According to the central bank’s guidelines, the following categories of loans are eligible for this scheme:

  • Consumption loans, like for social ceremonies etc. This includes a consumption loan availed by providing gold as collateral.
  • Automobile loans.
  • Credit card loans.
  • Home loans.
  • Consumer durables loans.
  • Education loans.
  • Personal loans availed by professionals.
  • Individual borrowers having availed MSME loans.

Categories of loans ineligible for the interest waiver scheme :

The RBI also underlined that the following categories of loans can’t be a part of the interest waiver scheme:

  • Loans exceeding Rs 2 crore.
  • Loans where property, fixed deposits and securities have been pledged as collateral.
  • Loans availed for agricultural and allied activities. This includes loans availed for purchasing agricultural equipment such as tractors.
  • Loans categorised as Non-Performing Assets (NPAs).

Thus, if you are an eligible borrower, the interest on interest waiver scheme can provide you with the much-needed financial relief. If you are looking for further financial aid, in these tough times, you can benefit from the personal loans, available on Finserv MARKETS app. The personal loans here have a range of benefits, like quick loan approval and disbursal, zero collateral requirement, flexible repayment tenures and attractive interest rates.