Over the weekend, the Finance Ministry made an official announcement for implementation of the waiver of “interest on interest” for the six month period. This would be applicable for loans up to an overall limit of Rs2cr per individual per financial institution and will exclude corporate loans (other than MSME loans). The total cost to the government due to this waiver of “Interest on interest” is estimated at Rs6,500cr to Rs7,000cr. The Finance Ministry has pushed this through to provide a palliative to the borrowers in the midst of challenging COVID-19 conditions. Here are some key questions you may seek answers for.
How will the waiver of “interest on interest” work and who bears the cost?
The cost of this waiver comes to around Rs7,000cr. Once the bank / financial institution refunds the money to the borrower, they can claim the refund from the government of India. However, it will have to be a cash refund to the borrower only. SBI will be the nodal agency to process refund of waiver amounts to individual financial institution.
Are all my loans eligible for the waiver of interest on interest?
There are two things you need to remember here. Firstly, this waiver of interest on interest on loans will only apply to retail and MSME borrowers; not to corporate borrowers. This will apply for the “interest on interest” charged for 6-month period between March-20 and August-20. Any charges before or after this period are not eligible for the waiver.
How exactly will the waiver money come back to the borrower’s account?
The Finance Ministry has set the deadline of November 05th
by which time all such “interest on interest” charged during this 6-month period must be refunded. It can either be credited back to the loan account, or to the bank account or to the credit card. However, any compensation in kind will not be permitted.
What are the specific loans eligible for this waiver and are their individual limits?
The outer limit is for borrowers with credit limit of Rs2cr under 8 broad categories. These include MSME loans, education loans, housing loans, consumer durables loans, credit card dues, auto loans, personal & professional loans and consumption loans. Loans that are backed by assets like mortgage loans and gold loans are not eligible for this waiver. The total limit under all the heads put together cannot exceed Rs2cr per person per lender.
Will this waiver apply to all loans taken by me?
To be eligible for the waiver of interest on interest, the lending institution must be a banking company, PSU bank, co-operative bank, RRB, All India Financial Institution, NBFC, HFC or an MFI. The important condition is that on Feb 29, 2020, your loan must not have been classified as a bad asset in the books of the lender.
What interest rate will be considered for the waiver of interest on interest?
In the case of fixed rate loans, the rate of interest applied will be the rate mentioned in the loan agreement. In the case of floating rate loans, the interest rate applied for this calculation will be the rate prevalent on 29th
February 2020. There is a slight divergence in the case of credit cards. Interest rate will be the weighted average lending rate (WALR) charged by the issuer for the 6-month period. For WALR Calculation, penal interest and late payment charges will not be considered.
Will this waiver be only for those persons who availed the moratorium facility?
No, the waiver is applicable to all borrowers who meet the criteria. It does not matter whether you applied for the EMI moratorium or not. Whether you availed full moratorium, part moratorium or did not avail moratorium, the waiver will still apply to you. You don’t have to make any separate application for this waiver. It will be done automatically by the bank / lender before November 05.
Can you explain this concept of refunding interest on interest with an illustration?
Let us assume that Rupesh has total outstanding home loan of Rs1cr. For simplicity, we assume that the loan carries 9% interest per annum and the bank charges 0.75% compounded each month. Here is how the calculation will look like.