The government on Friday spelt out the details of the waiver of interest on interest on loans up to Rs 2 crore where borrowers had taken moratorium during the lockdown and also made it clear that those who didn’t opt for it will get an ex gratia payment or a cashback.
The payment will be made to small businesses and individual borrowers with loans up to Rs 2 crore.
The finance ministry on Friday wrote to all RBI-regulated lenders, stating that the government has approved a “scheme for grant of ex gratia payment of the difference between simple interest for six months to borrowers in specified loan accounts” between March 1 and August 31, 2020. The lenders include banks, cooperative banks, housing finance companies and microfinance institutions.
This follows the government affidavit in the SC that it is willing to bear the difference between simple and compound interest on loans during the moratorium period.
Waiver of interest on interest may cost Rs 6.500 crore
This included compensation to those who paid on time and therefore did not have to pay compound interest. Government sources had estimated the cost of waiver of interest on interest at around Rs 6,500 crore. Under the government scheme, even borrowers who paid on time will get an amount equivalent to the difference between the simple interest that they paid and the notional compound interest on their loan outstanding as on the end of February 2020.
To avoid any legal complications, the government has said that the payment does not constitute a “contractual, legal or equitable liability of the central government and is only an exgratia payment”.
The government has specified the personal loans that are eligible by listing out education, housing, consumer durable, credit card and auto loans. All MSME loans would also get the exgratia or cashback into their accounts. Borrowers who availed the six-month moratorium will be compensated for the compound interest they would be charged by the banks while those who paid on time will get as cashback the notional interest on the interest that they paid.
According to a back of the envelope calculation by bankers, anyone who has paid EMIs on a Rs 1 crore home loan in time would be eligible to around Rs 16,000 of ex-gratia payment. This is assuming an interest rate of 8% which would result in half-yearly interest of Rs 4 lakh and compound interest of Rs 16,269.
The government has said that banks would credit the amount into the customer’s account and later claim it from the government. If the borrower has fully repaid the loan in between, the benefit would be calculated for the moratorium period when the loan was outstanding. The rate of interest would be the rate contracted in the loan agreement.
For credit cards, the banks would calculate the weighted average lending rate for transactions purchased on EMI basis from customers. For the sake of uniformity, lenders have been asked to do all their calculation on the outstanding loan balance as on February 29, 2020.