Banks asked to credit interest on interest to borrowers by November 5: Here is important point

New Delhi:The Reserve Bank today asked all lending institutions, including non-banking financial companies, to implement the waiver of interest on interest for loans up to ₹2 crore for the six months moratorium period beginning March 1, 2020.

The Centre has also informed the Supreme Court that lenders have been directed to credit in the accounts of eligible borrowers by November 5 the difference between compound interest and simple interest collected on loans of up to ₹2 crore during the RBI’s loan moratorium scheme.

Here are 10 things to know:

1) Last week, the government had issued the operational guidelines in the backdrop of the Supreme Court’s direction to implement the interest waiver scheme.

2) The scheme mandates ex-gratia payment to certain categories of borrowers by way of crediting the difference between simple interest and compound interest for the period between March 1, 2020 to August 31, 2020 by respective lending institutions. The RBI had announced a moratorium on repayment of debt for six months beginning March 1, 2020 to help businesses and individuals tide over the financial problems on account of disruption in normal business activities.

3) Housing loans, education loans, credit card dues, auto loans, MSME loans, consumer durable loans and consumption loans are covered under the scheme.

4) The scheme is also applicable on those who have not availed the moratorium scheme and continued with the repayment of loans.

5) The lending institutions after crediting the amount will claim the reimbursement from the central government.

6) Rating agency Crisil estimates that the scheme will cost the government about ₹7,500 crore and 75% of the borrowers will benefit from the interest-on-interest concession for small loans.

7) “CRISIL’s analysis shows a complete interest waiver (including interest on interest) for eligible loans up to ₹2 crore would have meant a staggering ~ ₹1.5 lakh crore impact. This could have posed significant challenges for the government as well as the financial sector. Waiver of only interest-on-interest will have a much milder and manageable impact,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings.

8) For availing this interest-on-interest waiver, the account should be standard as on 29th February, 2020. It should not be a non-performing asset (NPA) as on that date.

9) From a borrower’s perspective, the benefit depends on the loan amount and interest rate.

10) The benefit would be relatively higher for those who had availed of higher-yielding loans, Crisil said in a note. Consequently,  borrowers of unsecured, micro and gold loans will benefit more than those who had taken home loans.