As promised by it in the Supreme Court, the Centre on Saturday notified a scheme for grant of ex-gratia payment of the difference between compound interest and simple interest to borrowers, in specified loan accounts, for March-August period when a repayment moratorium existed. The scheme, designed to mitigate Covid-induced hardship to borrowers, will be available for loans (outstanding/sanction limit) up to Rs 2 crore.
The relief would cover MSME, education, housing and consumer durable loans, credit card dues, automobile loans, personal loans to professionals and also consumption loans availed from any lending institution.
Although there is no official word on the cost of the scheme to the exchequer, official sources said it could be around Rs 6,500 crore.
The relief will be available to borrowers irrespective of whether moratorium on loan repayment has been availed or not. The ex-gratia amount will be credited to the beneficiaries’ account by November 5. Hearing the matter related to the interest relief to borrowers on October 14, the Court had asked the government to come up with the notification/orders by November 2, the next date of hearing.
“Any borrower whose aggregate of all facilities with lending institutions is more than Rs 2 crore (sanctioned limits or outstanding amount) will not be eligible for ex-gratia payment under this scheme,” the department of financial services (DFS) said in a notification. The rate of interest for the relief would be as it prevailed on February 29, 2020.
Also, the ex-gratia will be available to borrowers subject to conditions that a loan account should be standard as on February 29 and the prevailing interest rates on that date would be factored in the relief. Other conditions include lending institution must be either a banking company, or a public sector bank, or a co-operative bank, a regional rural bank, or an all India financial institution, or a non-banking financial company or a housing finance company registered with RBI or national housing bank as the case may be. A non-banking financial company— micro finance institution should be a member of a Self-Regulatory Organisation (SRO) recognised by RBI. The lending institutions would have to lodge claim for reimbursement for the amount spent on the scheme from the Centre by December 15.
As reported by FE earlier, the government had stated in an affidavit that extending the interest relief to all “all types of loans for all categories of borrowers” would cause a huge burden of Rs 6 lakh crore on banks, likely wiping out a major part of their net worth and even rendering most of them unviable. The RBI also concurred with the government’s views in this regard.
The government and RBI had recently ruled out any further waiver of interest on interest, or compounding as this will entail significant economic costs which cannot be absorbed by the banks without serious dent to their financials, which in turn will have huge implications for the depositors and the broader financial stability.
According to the DFS notification, for education loans, housing loans, automobile loans, personal loans to professionals, consumption loans, the rate of interest to be applied for calculating the difference between simple and compound interest shall be the contracted rate as specified in loan agreement/ documentation in this respect. For consumer durable loans, the rate of interest to be applied for calculating the difference between simple and compound interest shall be the contracted rate as specified in loan agreement. documentation.
For credit card dues, the rate of interest shall be the weighted average lending rate (WALR) charged by the card issuer for transactions financed on EMI basis from its customers during the period from March 1 to August 31. For MSME loans, the rate of interest to be applied for calculating the difference between simple and compound interest shall be the contracted rate as specified in loan agreement/documentation in respect of the term loan. For cash credit (CC) / overdraft (OD), the rate of interest would be as prevailing on February 29, 2020. Penal interest or penalty for late payment would not be reckoned as part of the contracted rate or WALR.