In a significant relief to borrowers, the Finance Ministry recently announced the waiver of interest on interest for small loans up to Rs. 2 crores. The Supreme Court on 14th October approved the scheme and instructed the central government to implement the scheme as early as possible. 

The Central Government recently released the guidelines on how this scheme will be implemented and how the scheme's benefits will reach the borrowers. Here, in this guide, we take a closer look at the government's guidelines for the implementation of the waiver of compound interest on loans during the moratorium period.

Before we take a closer look at the guidelines, here's a quick overview of the scheme.

What is the "interest on interest" waiver scheme?

Broadly speaking, when a borrower takes a loan – personal loan, home loan, car loan, or any other type of loan – he/she has to pay compound interest on the loan amount to the lender. To help borrowers handle the financial stress due to the Covid-19 lockdowns, the Central Government offered an interim relief on loan EMIs known as a moratorium. The moratorium period lasted for six months from 1st March to 31st August. 

During this 6-month moratorium period, borrowers could opt not to pay their loan EMIs. The moratorium's objective was to help borrowers make ends meet, with reduced personal cash flow during the lockdown. However, the major catch of opting for the moratorium was that – ongoing loans continued to accrue interest during the moratorium period. This interest was added to the outstanding loan amount, thereby increasing the overall loan burden.

Understandably, this led to criticism from borrowers, who had to deal with the increase in loan burden during these challenging times. As a result, the Supreme Court ordered the Union Government to develop a scheme to provide relief to small borrowers.

Thus, the interest on interest waiver scheme was introduced. As per this scheme, the difference between compound interest and simple interest incurred by the loan during the moratorium period will be reimbursed to all eligible borrowers. It doesn't matter whether a borrower opted for the moratorium or not. He/she is still eligible for the interest on interest waiver.

Key Points to Note about the Interest on Interest Waiver Scheme 

  • The interest on interest waiver applies to all loans below Rs. 2 crores.
  • All eligible borrowers – irrespective of whether they availed of the moratorium partially, fully, or not – will get the cashback offered by the scheme.
  • The central government has asked all lenders to implement this scheme within 5th November 2020.  

Who is eligible? 

As per the Central Government's instructions, the Finance Ministry has identified eight loan categories for which the scheme is applicable. Loans up to Rs. 2 crores in these eight categories are eligible for the interest on interest waiver.

  1. Home loans 
  2. Education loans 
  3. Personal loans to professionals 
  4. Consumer durable loans 
  5. Car loans 
  6. Bike loans 
  7. Credit card dues 
  8. MSME loans 

However, note that the loan account should not be classified as an NPA on 29th February 2020 to be eligible for this scheme. This scheme is applicable across all lenders – public banks, private banks, housing finance companies, and non-banking financial corporations.  

How is the reimbursement amount calculated?

As per the Central Government notification, the cashback offered by this scheme is calculated based on the difference between compound interest and simple interest incurred by the loan during the moratorium period (from 1st March to 31st August). The scheme will pay the benefit as an ex-gratia payment. 

For the sake of calculating the reimbursements, any repayments made during the moratorium period will be ignored. The interest rate for the calculation will be fixed based on the loan agreement as of 29th February 2020. Any changes in interest rates after that will not be considered. 

For credit card dues, the rate of interest is fixed based on the weighted average lending rate. This is the interest rate charged by the card issuer for transactions between March and August. 

For cash credit, the calculation of simple interest will be done on a day-to-day basis, depending on the interest rate as of 29th February 2020. On the other hand, compound interest will be calculated month on month. The difference between these two interest calculations is the cashback that will be credited to the borrower's account.  

Is the benefit offered for borrowers who did NOT opt for the moratorium?

Yes. The government has mentioned explicitly that the cashback is for all eligible borrowers – irrespective of whether they opted for the moratorium partially, entirely, or not at all. To calculate the reimbursement amount, banks and other lenders will not consider any EMI payments during the moratorium period. This offers a uniform calculation method for all eligible borrowers. It is not impacted by the opting in/out of the moratorium.

Who will bear the cost of the reimbursements? 

The Central Government has mentioned that it will bear the cost of the implementation of this scheme. It is estimated that this scheme will cost the government around Rs. 6,500 crores. 

What needs to be done at the lender’s side? 

Banks and other lenders have been instructed to set up a grievance redressal cell to implement this scheme. Additionally, lenders will pre-audit claims using internal statutory auditing bodies. The SBI will act as the nodal agency for the government, receiving and settling claims.

Since all banks have the required information about the eligible borrowers, they don't have to put in place a new infrastructure to implement this scheme.

What should borrowers do to receive the cashback? 

Nothing. Borrowers do not have to take any measures from their end. Their lender will handle it all. The lender will draw up a list of eligible borrowers, calculate the difference between compound interest and simple interest, and credit the amount in the borrower's loan account. The government has set a deadline of 5th November to receive the cashback. So, keep track of your loan account and see if you receive the cashback before/on this date. If you don’t receive the cashback by then, you can contact the lending cell at your bank/NBFC to help you out.