The rate of interest to be applied for calculating the difference between simple and compound interest shall be the contracted rate as per loan agreement.
The RBI has notified the Scheme for grant of ex-gratia payment of the difference between compound interest and simple interest for six months ending August 31, 2020. In view of the unprecedented and extreme COVID-19 situation, the object of the Scheme is to provide ex-gratia payment of the difference between compound interest and simple interest by way of relief for the period from 1st March 2020 to 31st August 2020 to borrowers in specified loan accounts.
Only those borrowers who have loan accounts having sanctioned limits and outstanding amount of not exceeding Rs. 2 crore (aggregate of all facilities with lending institutions) as on 29.2.2020, shall be eligible under the Scheme. Further, the loan account should be standard as on February 29, 2020, i.e. a loan should not be a Non-Performing Asset (NPA).
The eligibility will only for the following segments/classes of loans:
1. MSME loans
2. Education loans
3. Housing loans
4. Consumer durable loans
5. Credit card dues
6. Automobile loans
7. Personal loans to professionals
8. Consumption loans
The period to be reckoned for crediting of difference between compound interest and simple interest by the lending institutions would be from 1.3.2020 to 31.8.2020 (six months / 184 days). For accounts closed during the said period, the period for crediting would be from 1.3.2020 and restricted to the date of closure of such account.
The rate of interest would be as prevailing on 29.2.2020, i.e., in case the rate of interest has changed thereafter, it shall not be reckoned for the purposes of this computation. The payable ex-gratia amount shall have to be credited to the account of the borrower by the respective lending institutions as ex-gratia payment under the scheme on or before 5.11.2020.
Education loans, Housing loans, Automobile loans, Personal loans to professionals, Consumption loans: The rate of interest to be applied for calculating the difference between simple and compound interest shall be the contracted rate as specified in loan agreement/ documentation in this respect.
Consumer durable loans: The rate of interest to be applied for calculating the difference between simple and compound interest shall be the contracted rate as specified in loan agreement/ documentation.
In cases where no interest is being charged on Equated Monthly Instalments (EMI) for a specified period, for the purpose of ex-gratia payment, interest may be applied at the lender’s base rate / Marginal Cost of funds based Lending Rate (MCLR) whichever is applicable.
Credit card dues: The rate of interest shall be the Weighted Average Lending Rate (WALR) charged by the card issuer for transactions financed on EMI basis from its customers during the period from 1st March 2020 to 31st August 2020.
Mode of calculation of simple and compound interest
As Education loans, Housing loans, Consumer Durable loans, Credit card dues, Auto Loans, Personal loans and Consumption loans are loans that are in the form of a Term Loan / Demand Loan and not a Cash Credit or an Overdraft facility, the outstanding in the account as at the end of 29.2.2020 will be the reference amount for Term Loans on which the interest (simple as well as compound) will be calculated.
While making the calculation, repayments in the loan account during the period to be reckoned will be ignored. This will make the approach of the lending institutions uniform for all borrowers, irrespective of whether they have fully availed or partially availed or not availed of the moratorium on repayment of the respective loans as announced by the RBI. As a uniform rate is not available, WALR will be utilised as the benchmark rate.