Against the background of the Public Interest Litigation (PIL) filed with the Supreme Court and the subsequent clarifications provided by the Government of India, the scheme for granting ex-gratia payment of the difference between compound interest and simple interest is for six months to borrowers in itemized loan accounts (March 1, 2020 to August 31, 2020).
Himanish Chaudhuri, Partner, Deloitte India, says: “The scheme will provide much needed temporary relief to borrowers in the current pandemic scenario. However, the greater concerns about credit quality and growth in credit decline remain and we may have to wait until the end of this fiscal year to gain a better understanding of that.”
Experts say the operational guidelines and FAQs released by the Ministry of Finance are intended to provide clarity to banks and credit institutions. Chaudhuri says: “The guidelines and FAQs released by the MOF will provide operational clarity not only to the lending institutions but also to consumers about the modalities of the scheme, including its suitability, calculation method (for both EMI and continuous credit products), refunds and complaint handling.” The recently released FAQs provide several clarifications about the original schema document that was released.
Here are some of the key clarifications from the FAQ:
– A limit of 2 crores should be calculated for all loans/facilities from all banks and financial institutions. It also clarifies that lending institutions must obtain this information from the credit bureau.
– Respective banks/lending institutions have been given the responsibility to identify the eligible borrowers without the need for the borrowers to make an application.
– Non-fund based facilities are not counted for eligibility. Furthermore, loans against FD, stocks and loans for investments in financial assets are not eligible for the scheme.
– Customers who are SMA-0,1,2 are eligible for the scheme as long as they are not Non-Performing Asset (NPA)
The calculation method is also explained in the diagram and further clarified in the FAQs. The same is different for EMI-based term loans and revolving credit products such as cash credit/overdraft.
Chaudhuri says: “For term loans, the amount outstanding is taken as the basis from February 29, 2020 and the interest is calculated on the base amount under both simple and compound interest (with a monthly reset or according to covenants) at the contract rate as on February 29, 2020. The refund during the ex-gratia period is to be disregarded and the difference between this compound and simple interest will be credited to the customer by November 5.
For the cash credit/overdraft, simple interest is calculated on a daily outstanding amount, while compound interest is calculated on monthly compounding amounts. Note that, even for the loans taken out, the benefit of a difference will be provided until the closing date. The FAQs also clarify the specific application of rates and method for credit cards, MSME loans and other term loan products in clear detail.
Borrowers, whether they have taken partial or full use of the deferred payment, will receive the benefit of ex-gratia provided they meet the eligibility criteria. The amount of the repayment will be credited to the customer’s loan account, reducing the term of the loan as the same will be allocated according to the existing agreement.
Chaudhuri adds: “Capital injection to meet CAR requirements in the face of increased credit risk, improve borrowing in SMEs and core sectors of the economy to boost consumption and better control operating costs will be the key success factors. for the banking sector in the short term.”