Moratorium Loan Interest Cashback Explained In 12 Points

This week, the Finance Ministry notified "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)."

In simple words, these are guidelines released by the government based on orders of the Supreme Court to credit any interest-on-interest charged on loans of small customers during the 6-month moratorium period announced by the RBI in light of COVID-19.

Here are 12 highlights on the moratorium interest waiver scheme for full understanding:

1. Loans eligible under the scheme are: MSME loans, education loans, housing loans, consumer durable loans, credit card dues, automobile loans, personal loans to professionals and consumption loans.
2. In the above categories of loans, only those having sanctioned limits and outstanding amount not exceeding Rs 2 crore as on 29 February 2020 are eligible.
3. The loan should be "standard" as on 29 February 2020 and not classified as a non-performing asset (NPA) as on the date. A loan, under normal circumstances, is classified as a non-performing asset (NPA) by a bank (or other lenders), when a borrower fails to repay dues for over 90 days after the due date.
4. The interest payment (that is difference between compound interest and simple interest) will have to be made by the bank to the eligible accounts irrespective of whether or not the moratorium was availed by the borrower of loan for the period between 1 March 2020 to 31 August 2020.
5. Banks and other financial institutions have been asked to credit the difference between the compound interest and simple interest to eligible loan accounts by 5 November 2020.
6. Account-holders need not apply for the interest-on-interest waiver scheme. The bank/financial institution will credit this ex-gratia amount into the accounts of eligible customers.
7. The outstanding amount in the loan account at the end of 29 February 2020 will be used as the reference amount for term loans the interest (simple as well as compound) will be calculated. In calculating the interest, repayments in the loan account will be ignored, to make the calculation uniform irrespective of whether the borrower availed the moratorium or not.
8. For cash credit/ overdraft facilities, simple interest for the 6-month period will be calculated on the daily outstanding balance at the end of the day at the rate of interest as on 29 February. Compound interest will also be calculated based on the interest rate as on 29 February 2020 and compounding will be done on monthly rests.
9. The interest rate applicable for the calculation of the difference between compound interest and simple interest under the scheme would be the interest rate prevailing on 29 February 2020, irrespective of the change in interest rates thereafter.
10. For accounts closed during the moratorium period, the period for crediting would be from 1 March 2020 to the date of closure of the account.
11. A mechanism has been put in place for banks to claim this amount returned to customers from the government. Lenders have to submit claims for reimbursement by 15 December through a special cell set up in the State Bank of India (SBI).
12. Banks and other financial institutions have been asked to set up a grievance redressal mechanism for eligible borrowers under the scheme within a week regarding the resolution framework for COVID-19 related stress. The dedicated cell in SBI will work in tandem with the Finance Ministry to resolve grievances of the lenders while implementing the scheme.