Cabinet approves Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts

What is the News?

The Union Cabinet has approved the payment of ex-gratia amount pertaining to claims submitted by Lending Institutions (LIs) under “Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts”.

What is the “Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts”?

Borrowers who take loans from any financial institution are charged compounded interest. As a relief for people affected by COVID-19 induced lockdown, the Central government and RBI gave a loan moratorium for a period of six months — from March 1 to August 31, 2020. 

The borrowers who availed of the moratorium would have to pay interest during this period, which would be added to the total loan amount. But following the Supreme Court’s direction, the government came up with this scheme in a bid to provide relief to small borrowers. 

As per the scheme, the difference between the compound interest and simple interest will be reimbursed to the eligible borrowers irrespective of whether he/she availed of the moratorium or not.

Note: Calculation of simple interest is on the principal or the original amount of a loan. On the other hand, compound interest is calculated on the principal amount plus accumulated interest of previous periods. Thus, it can be regarded as “interest on interest”.
How was the interest differential calculated?

The interest differential was calculated based on the interest rate as of February 29, 2020. For credit card holders, the amount will be calculated based on the rate charged by the bank for breaking outstandings down into EMIs.

For example, one has a loan with an outstanding of ₹10 lakh and the bank charges 8% interest. For the period of six months, his/her interest component would be ₹40,672. For the same period, the simple interest would be ₹40,000. The difference of ₹672 would be a relief.

The relief amount will be credited to the borrower’s loan account. After crediting, lending institutions would claim reimbursement from the central government.

Who was eligible for the scheme?

As per the guidelines, the scheme can be availed by borrowers who have taken loans not exceeding ₹2 crores. The RBI has included the following loans under the scheme: MSME loans, Education loans, housing loans, Consumer durable loans, credit card dues, Auto loans, Personal loans to professionals and Consumption loans.

Source: This post is based on the article Cabinet approves Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accountspublished in PIB on 19th January 2022

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