Interest waiver: Paid EMI on time during lockdown? Banks to offer cashback now

In a major relief to borrowers amid a global pandemic, the finance ministry has issued the guidelines for implementing a waiver of 'interest on interest' for six months. The payments will be made to individual borrowers and small businesses with loans of up to ₹2 crore.

In the wake of coronavirus pandemic in the country, the Reserve Bank of India had in March announced a moratorium on repayment of EMIs and credit card dues for three months. The central bank later extended the moratorium period till 31 August. A borrower from Agra later filed a petition in the Supreme Court that no interest should be charged during the moratorium, considering the 'extreme hardship' faced by people during pandemic.

The Centre then approved the scheme to ‘grant of ex-gratia payment of difference between compound and simple interest to borrowers of specified loan accounts’ from 1 March to 31 August.

The interest waiver scheme will apply to

The benefit will be extended for loans below ₹2 crore availed across eight categories: 1) Micro, small and medium enterprises (MSMEs) loans, 2) Education loans, 3) Housing loans, 4) Consumer durables loans, 5) Credit card dues, 6) Auto loans, 7) Personal and professional, 8) Consumption loans

The lending institution has to be either a banking company, or a public sector bank, co-operative bank or a regional rural bank, or All India Financial Institution, a non-banking financial institution, housing finance company or a micro finance institution.

Key features of interest waiver scheme:

1) The scheme mandates ex-gratia payment by way of crediting the difference between compound interest and simple interest for the the period of six months — 1 March, 2020- 31 August, 2020.

2) The rate of interest will be as per the rate mentioned in the loan agreement, in case of education, housing, automobile, personal and consumption loans. The rate of interest will be as prevailing on 29 February.

3) In case of credit card dues, the interest rate will be the weighted average lending rate (WALR) charged by the card issuer for transactions financed on an EMI basis from its customers during 1 March-31 August, it said. Penal inteterest and penalty for late payment will not be reckoned as part of the contracted rate or WALR.

4) The lenders must credit the difference between compound interest and simple interest to the eligible borrowers by 5 November.

5) For cash credit, simple interest will be calculated on a daily basis at the rate as on 29 February, 2020. Compound interest will be calculated on monthly basis. The difference between the two will be credit to the customer’s account.

Who will be eligible?

The scheme will be valid for borrowers who availed the moratorium fully, partially or not at all, as mentioned in the circular.

“While making the calculation, repayments in the loan account during the period to be reckoned will be ignored. This will make the approach of the lending institution uniform for all borrowers, irrespective of whether they have fully availed or partially availed or not availed of the moratorium....” the government notification said.

For borrowers

For any borrower who has maintained their account in standard state and has been making timely payment pre-COVID-19 is eligible for this credit, said Anil Pinapala, CEO, Vivifi finace india private limited.

"For the customers who opted into moratorium they will be just required to pay the simple interest in their outstanding and any compounded interest will be waived by the financial institution," Pinapala added.

For lenders

State Bank of India (SBI) will be the nodal agency under the present scheme and will receive funds from the government for settlement of claims of the lending institutions, the finance ministry said. Lenders have been asked to submit their claims for reimbursement by 15 December 2020.

“SBI shall evaluate the claims to ensure that they are in conformity with this scheme’s guidelines, and shall furnish to the central government statements of claims found eligible and claims settled," it said.

The Centre may have to take a hit of ₹6,500 crore for the implementation of the scheme, a senior government official said