Govt waives interest on interest for loans up to Rs 2 crore Latest News

At the onset of the festive season in India, the finance ministry has delivered a reason for cheer to those who have outstanding loans. The government on Friday issued guidelines for a scheme under which it would pay the interest on interest for those who have or had outstanding loans (during the last six months) for MSME, education, automobiles, housing and even had credit card payments due, under the six-month moratorium on repayments announced by the Reserve Bank of India.

In a significant move, the benefit of the scheme would include those who availed of the moratorium, partially used the moratorium and those who didn't avail the relief.

The government on Friday issued the guidelines for the scheme after the approval by the cabinet committee on economic affairs last Wednesday. The order said that the scheme for the ex-grati payment of difference between the compound interest and simple interest or simply put interest on interest for six months for MSME loans, education loans, loans, consumer durable loans, personal loans auto loans and credit card dues has been cleared.

The cost of this scheme for the government is expected to be in Rs 5,500-6,000 crore range.

This scheme only covers borrowers who have loans up to Rs 2 crore. The CCEA had cleared the proposal as a response to the Supreme Court order on the waiver of compound interest or "interest on interest" for the 6 month moratorium period following the coronavirus pandemic.

The guidelines were issued by the department of financial affairs or the banking department of the finance ministry on Friday and sent to all nationalised banks, all india financial institutions, all banking companies, urban cooperative banks, state cooperative banks and housing finance companies for implementation.

The guidelines also include details about mode of calculation of simple and compound interest and the applicable rate of interest.

WHO BENEFITS FROM THE SCHEME?

The order lays down the conditions for eligibility for the scheme. Any borrowers whose aggregate of all loans is more than Rs 2 crore would not be eligible. This means that the scheme benefits small borrowers.

The exgratia shall be admissible irrespective of whether the borrower fully availed of the scheme, partially availed or did not avail of the moratorium on repayment scheme announced by the RBI.

The loan account should not be an NPA as on February 29 this year and lending institution must be a banking company, PSB or cooperative bank etc.

The reckoning period for the scheme is March 1, 2020 till August 31, 2020.

The guidelines also provide the list of lending institutions covered by the scheme.

The government order states that the "exercise of crediting the amount in the respective accounts of eligible borrowers by the lending institution would be complete on or before November 5".

Lending institutions can lodge their claim for reimbursement latest by December 15.

On Wednesday, top ministers and the finance ministry had refused to divulge the details before presenting it in the apex court. But sources had told India Today that the cabinet committee on economic affairs or CCEA cleared proposal for an ex-gratia payment of 'interest on interest' charged on loans for the moratorium period.

SUPREME COURT PUSHED GOVT TO ANNOUNCE RELIEF

The issue arose when Reserve Bank of India announced a six-month moratorium for repayment of loans. Under this, borrowers could defer EMI payments for the moratorium period decided by the RBI. However as per normal banking procedure since the interest component was not deferred, it kept getting added to the principle amount. The addition to the principle amount would have either meant increased number of EMIs or higher monthly payment post moratorium period.

A petition challenging this component of the moratorium and seeking complete waiver of the interest during the period was filed in Supreme Court and the court had ordered that the government must correct the picture.

In response, the government's affidavit had stated that for a select category of borrowers it would waive "interest on interest" on loans up to Rs 2 crore under the moratorium scheme.

In the second week of October, the apex court, in a clear directive, asked the union government to present a well laid out plan on the scheme at the next hearing scheduled on November 2. The government is set to present the decision taken by the CCEA in the Supreme Court.

The government held series of discussions on the issue given the cost of the proposal and also the signal it would send to borrowers who despite hardships did not avail the scheme and paid up their loan dues. That's why, eventually, a decision was taken that even those who paid their EMIs regularly and didn't opt for deferment should also be extended the benefits of the scheme.

During the last hearing in the Supreme Court, the three-judge bench comprising of Justices Ashok Bhushan, Subash Reddy, and MR Shah has stressed that despite an assurance from the government that it would waive compound interest and there was neither a timeline provided and not a clear plan for implementation submitted.

Justice Shah during the hearing had told Solicitor General Tushar Mehta that "Diwali is in your hands now". Mehta has sought time till November 15 for the government to work out the modalities after informing the court that the RBI and the union government have identified eight categories and the computation would be done based on the interest component of each of those loan accounts

However, Justice Bhushan had said, "Once the government has taken a decision, there is no need for delaying the issue any further as the interest of the common man in play, banks cannot take so much time to provide relief and leave account holders in uncertainty".

The bench argued that with the interest of the common man in play, banks cannot take so much time to provide relief and leave account holders in uncertainty.

"Once the government has taken a decision, there is no need for delaying it any further," Justice Bushan said.

The Centre recently told the apex court that going any further than the fiscal policy decisions already taken, such as waiver of compound interest charged on loans of up to Rs 2 crore for six months moratorium period, may be "detrimental" to the overall economic scenario, the national economy and banks may not take "inevitable financial constraints".

The top court is hearing a batch of petitions which have raised issues concerning the six-month loan moratorium period announced due to the Covid-19 pandemic.