Interest waiver on loans: What is compound interest waiver scheme, who is eligible for benefits and other details

File image

The Ministry of Finance on October 23 released guidelines on waiver of compound interest for certain categories of loans up to Rs 2 crore.

The Reserve Bank of India (RBI) had in March offered a three-month moratorium on loans, enabling borrowers to defer repayments on EMIs and other loans. This was later extended by another three months till August 31, 2020.

Petitions seeking a complete waiver of interest during the moratorium period have been filed in the Supreme Court. The apex court will continue hearing the pleas on November 2.

The Centre had in an affidavit issued earlier in October agreed to waive "interest on interest" on loans up to Rs 2 crore taken by individuals and micro, small and medium enterprises (MSMEs).

Also read: Finance Ministry issues guidelines for implementation of interest waiver on loan

What is the compound interest waiver scheme?

The government will grant eligible borrowers ex-gratia payment of the difference between the compound interest and simple interest for the six-month moratorium period. This will cover loans where instalments were due from March 1 to August 31.

The exercise of issuing the payments will be done on or before November 5, 2020, the Department of Financial Services said.

Why was the interest on interest waiver scheme introduced?

The loan moratorium, and waiver of compound interest, was aimed at providing borrowers relief amid the economic impact of the COVID-19 pandemic.

Lawyers representing individual and corporate borrowers had sought relief with regard to accruing interest on the loans.

Also read: India must not neglect bank recap despite pandemic, says former RBI deputy governor Viral Acharya

Who is eligible to avail the compound interest waiver scheme?

Loans up to Rs 2 crore in the following categories are eligible - MSME, education, credit card dues, housing, automobile, personal loans to professionals, consumer durable and consumption.

Here are the other eligibility criteria for interest waiver:

> The loan should be classified as standard, and not a non-performing asset (NPA), as on February 29.

> The ex-gratia payment will be made irrespective of whether the borrower had availed of the moratorium partially or completely, and even if they had not opted for the moratorium.

> The rate of interest as on February 29 will be taken into account during the calculation. If the interest rate for the loan has changed after that, it will not be reckoned for the scheme.

> Borrowings by non-banking finance companies (NBFCs) and housing finance companies (HFCs) will also qualify under the scheme.