'Interest on interest' waiver: What you need to know

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Ahead of the festival season, the Finance Ministry announced waiver of interest on interest for loans up to ₹2 crore. The move comes in the backdrop of Supreme Court’s direction to implement the interest waiver scheme, which is likely to cost the exchequer ₹6,500 crore.

The apex court on October 14 directed the Centre to implement “as soon as possible” interest waiver on loans of up to ₹2 crore under the RBI moratorium scheme in view of the COVID-19 pandemic saying the common man’s Deepavali is in the government’s hands.

What is “interest on interest” waiver?

Borrowers who take loans from any financial institutions are charged compounded interest. As a relief for people affected by COVID-19 induced lockdown, the Central government and RBI gave a loan moratorium for a period of six months — from March 1 to August 31, 2020. The borrowers, who availed of the moratorium, would have to pay interest during this period, which would be added to the total loan amount. Following the Supreme Court’s direction, the government came up with a scheme in a bid to provide relief to small borrowers.

As per the scheme, the difference between the compound interest and simple interest will be reimbursed to the eligible borrowers, irrespective of whether he/she availed of the moratorium or not.

Who is eligible?

As per the guidelines, the scheme can be availed by borrowers who have taken loans not exceeding ₹2 crore (aggregate of all facilities with all lending institutions) as of February 29. The RBI has included the following loans under the scheme:

  • MSME loans
  • Education loans
  • Housing loans
  • Consumer durable loans
  • Credit card loans
  • Automobile loans
  • Personal loans for professionals
  • Consumption loans

Who is not eligible?

  • Borrowers whose aggregate loans exceed ₹2 crore.
  • Agriculture and allied activity loans
  • Loans taken for buying tractors
  • Loans taken against fixed deposits, securities, property or gold
  • Non-performing assets

How is it calculated?

The interest differential will be calculated based on the interest rate as on Feb 29.

For credit card holders, the amount will be calculated based on the rate charged by the bank for breaking outstandings down into EMIs.

Say, you have a loan with an outstanding of ₹10 lakh and the bank charges 8% interest. For the period of six months, your interest component would be ₹40,672. For the same period, the simple interest would be ₹40,000. The difference of ₹672 would be the relief.

The amount will be credited to the borrower’s loan account on or before November 5. If the loan account was closed during this period, the amount will be credited to the person’s savings/current account.

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Printable version | Dec 5, 2020 7:21:17 AM |

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