In a huge relief to borrowers on loans not repaid during the 6-month moratorium (March to August), the Modi government has announced a scheme for ex gratia payment to borrowers. Under this scheme, banks and financial institutions will reimburse the differential between compound and simple interests. In other words, the government has announced to waive interest on interest on loans.
The benefit will be extended for loans below Rs 2 crore in eight categories. The categories are MSMEs, education, housing, consumer durables, credit card, auto, personal, and consumption.
How will borrowers benefit
The benefit will be extended to borrowers irrespective of whether the moratorium was availed of or not.
Banks and lending institutions have been asked to credit the amount to the borrower's account by November 5.
Notably, borrowers who have been making timely payment pre-COVID-19 are eligible for this credit.
Credit card interest waiver
In the case of credit card dues, the interest rate will be the weighted average lending rate (WALR) charged. The penal interest and penalty for late payment will not be reckoned.
The ex-gratia will be refunded to the account of borrowers without any requirement to apply.
EMIs to come down
The government's scheme will reduce the compound interest portion which was slapped by banks and financial institutions to outstanding loan amounts during the period of moratorium. Once the repayment procedure is over, borrowers will be able to see their outstanding amount decrease.
The reduction in outstanding will ultimately result in lower EMIs for the remaining tenure. Also, this will cut the future repayment burden.
Scheme to cost exchequer Rs 7,500 cr
According to an estimate, the ex-gratia payment of interest-on-interest by banks and non-banking finance companies for the moratorium period would cost the exchequer 7,500 crore. Crisil Ratings said that the cost to the exchequer would have halved if the waiver was allowed only where a moratorium was availed of.
The moratorium was announced by the Reserve Bank of India in March as part of measures to mitigate economic hardships caused by the coronavirus-induced lockdown in the country.