EXPLAINED | Banks To Give Cashback For Interest Waiver To Borrowers Before Diwali: Understand In 10 Points

In order to ease down the financial burden, the RBI has directed all the banks and financial institutions to credit the 'interest on interest' component of outstanding loans to eligible borrowers before November 5.

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New Delhi: In a move to ease the financial burden, the Reserve Bank of India directed all the banks and the financial institution of the country to implement the central government’s scheme of interest-on-interest waiver loans for up to Rs. 2 crores for the six-month loan moratorium period from March 1, 2020, to August 31, 2020. This comes after months of argument on the matter, the government on Friday formally announced details of the scheme to help small borrowers who had availed the temporary relief during the moratorium. The government on Tuesday said that the banks will mandatorily grant payment of the difference between compound interest and simple interest for six months to eligible borrowers. The government has asked the lenders to complete the crediting of ‘interest on interest’ charges in the accounts of borrowers by November 5. Government loan waiver explained: 1. October 23, 2020 the scheme was announced by the finance minister under which banks and other lending institutions are mandated credit ‘interest on interest’ or compound interest charges for loans up to Rs 2 crore during the moratorium period. 2. With the “interest on interest” scheme, the move is expected to ease down the financial burden on lakhs of small borrowers who had availed the moratorium from March 1, 2020, to August 31, 2020. 3. In order to maintain uniformity, the scheme will also apply to borrowers who did not apply for the moratorium. If the borrower fits in the eligibility criteria, then the individual will receive a cashback from the bank for the timely payment of loans. This amount will also be credited to a borrower’s outstanding loan before by November 5. 4. MSMEs, education, automobiles, consumer durables, personal, housing and credit card dues will be covered under the ‘interest on interest’ waiver scheme. 5. The RBI has also advised all lending institutions in the country to grant relief to borrowers within the stipulated time. Compound interest charges for loan amount up to Rs 2 crore will have to be credited by banks for the six-month moratorium period. 6. With loans up to Rs. 2 crores, all the borrowers will be eligible, to benefit under the government’s ‘interest on interest’ waiver scheme. This means that any person or MSME with a loan amount exceeding Rs 2 crore will not be eligible for the benefit. It is also to be noted that accounts that were declared NPA as of February 29, 2020 will not be eligible for the benefit under the scheme. It may be noted that the reckoning period of the scheme is from March 1, 2020, to August 31, 2020. 7. For those who have earlier applied for the moratorium will see a reduction in outstanding amount after the interest or interest waiver is credited. This will lead to a lower equated monthly installment for the rest of the loan tenure. Even those people who did not avail the moratorium and made timely payments will also be rewarded with cash backs. This is also likely to decrease their outstanding amount, -resulting in lower EMIs for the rest of the remaining period. 8. The loan moratorium waiver scheme is likely to cost the government Rs 6,500 crore. Banks and financial institutions all over the country are expected to start crediting the amount for ‘interest on interest’ charged during the six months of the moratorium. After they are done with the crediting process to eligible borrowers, banks can lodge their claims with the government for reimbursement by December 15. 9. The step has been taken by the government in order to remove the compound interest component of outstanding loans that accumulated during the six months of loan moratorium. As mentioned earlier, small borrowers will get slight relief as their outstanding loan amounts will reduce. The reduction is likely to result in a reworked payment cycle, which will offer more breathing space to small borrowers. 10. With the “interest on interest” scheme of the government all categories of buyers under the credit amount of Rs. 2 crore are expected to benefit. Meanwhile  credit card owners who opted for the moratorium are expected to benefit the most. It is worth noting that the Centre had earlier asked for a month’s time to implement the interest on interest waiver scheme, but the Supreme Court denied its request. The SC then asked the Centre to implement the scheme and credit the ‘interest on interest’ charges to borrowers as soon as possible.