Compound conundrum: On interest waiver

News: Government of India has announced a scheme called, ‘Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts’.

Facts:

  • Aim: To provide major relief for individuals and MSME borrowers by waiver of the compound interest on specified loans for six months period.
  • What does it mean? In simple words, the borrowers need to pay simple interest on their loan amount for the six month period between March and August as against the compound interest.
  • Categories: The loans eligible under the scheme include MSME loans, education loans, housing loans, consumer durable loans, credit card dues, automobile loans, personal loans to professionals and consumption loans.
  • Eligibility: Any borrower whose aggregate of all facilities with lending institutions is more than ₹2 crore (sanctioned limits or outstanding amount) will not be eligible for ex-gratia payment under this scheme. Also, the loan accounts should not be non-performing assets(NPA) as on the date mentioned above.
  • Lending Institutions: The lending institution has to be either a banking company, or a public sector bank, co-operative bank or a regional rural bank, or All India Financial Institution, a non-banking financial institution, housing finance company or a micro finance institution.

Additional Facts:

  • Simple and Compound Interest: Simple interest is calculated on the principal, or original, amount of a loan.On the other hand, Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods and can thus be regarded as “interest on interest”.
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