From last many months there is case going on in Supreme Court against the compound interest i.e. interest on interest, which was not paid during the loan moratorium period wherein Central government had asked banks to waive off such interest.
During the hearing Hon’ble Supreme court had asked Central government to come up with a scheme to compensate the banks for it’s loss before asking them to waive of the interest.
Now, Ministry of Finance have finalized a scheme for waiving off such interest which shall be called as: “Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (1.3.2020 to 31.8.2020)”
This scheme can also be called as “Cash-back” scheme where difference amount would be credited in the account of borrower.
It is also important that such benefit will be available for all types of borrower of the above category loans whether or not they had availed benefits of moratorium. As the case was done by people who had availed moratorium and to waive off interest on interest.
Now, even though the name is long scheme is not that long or complex atleast for the consumer/ borrower, let’s have a look at each and every part of scheme one by one:
1. Eligibility Criteria:
The ex-gratia payment under this scheme shall be available irrespective of whether the borrower has fully availed, partially availed or not availed of the moratorium on repayment announced by RBI.
Borrowers having sanctioned limit and outstanding amount of not exceeding Rs. 2 crore in below loans would be eligible for this scheme.
- MSME loans
- Education loans
- Housing loans
- Consumer durable loans
- Credit card dues.
- Automobile loans
- Personal loan to professionals
- Consumption loans
Any borrower whose aggregate of sanctioned limit or outstanding amount of all facilities with lending institutions is more than Rs. 2 crore won’t be eligible for this scheme.
What we can understand from this is if a person has housing loan with sanctioned limit of 3 crore but outstanding of less than 2 crores on 01.03.2020 would also not be eligible for this loan. Further if a person has education loan plus house loan with outstanding more than 2 crore then also he shall not be eligible.
2. Type of loan account and bank:
Loan account should be a standard account as on 29.02.2020 and not a NPA.
Lending institution should be banking company, public sector bank, co-operative bank, regional rural bank, housing finance bank registered with RBI, national housing bank etc.
3. Under this interest payment scheme difference between compound interest and simple interest for the period of 01.03.2020 to 31.08.2020 would be credited to the loan account of the borrower by the institution. If the loan account was closed between this period the calculation shall be restricted upto that period.
4. The rate of interest which will be used for calculating the difference of interest above would be rate of interest prevalent on 29.02.2020 irrespective of change in rate of interest later, as we know RBI had reduced repo rate and in turn many banks had reduced their interest rate.
5. The above amount of difference shall be credited in the accounts of eligible borrowers on or before 05.11.2020.
6. After the amount is credited this amount in borrowers account till 05.11.2020, bank can lodge their claim with Central government till 15.12.2020 with SBI.
In the above scheme there is a full procedure for the institutions to calculate the claim amount and the procedure of claiming their amount from government if any.
As per the reports it is said that the next/ last hearing on same would be on 02.11.2020 in Supreme court and in the last hearing hon’ble Supreme court had asked the Central government to make it a “Happy Diwali” for all.
It is being speculated that this will cost the government approximately 6,500 crores.
It is important to note that although this will support banks (which will in turn give positive impact on bank nifty) and increasing spending powers of consumer but on the other hand it can be seen that government is facing liquidity crises which was projected at the time of settlement of GST claim of states and now with this claim from bank the government should come up with some good financial planning to generate revenue rather than increasing tax and again taking money from people.
In the end one thing to note is that, this scheme will credit the amount of difference between compound interest and simple interest during the period of six months of loan moratorium.
Therefore this is still not full waiver of interest on interest but refund of amount of difference between compound interest and simple interest charged during the period.
Thus, the people who had not taken would be at some benefit as they will get some “cash-back” for paying back the loan and the people who had taken moratorium will get some benefit.
In the end if you have any such loan you must ask to your bank or lending institution and write them a letter about when will this amount get credited to your account so that you become eligible and bank know that you want to avail this benefit.
Although it is not mentioned in the scheme whether all eligible borrowers would get the amount automatically or they have to manually apply but it is always good practice to write a letter and ask for same.
This is obviously going to be a welcome step from Central government to people after they had announced advance for government employees to spend during festive season.
To read the full scheme CLICK HERE.