Compound interest

Everything you need to know about the government’s compound interest exemption plan

The government announces an ex gratia payment system for the difference between compound interest and simple interest. Here is all the information you need to know about the government’s compound interest exemption scheme.

Interest exemption scheme

On October 23, the RBI called on all lending institutions, including NBFCs, to implement the interest relief scheme for loans up to two crore. The scheme requires payment of the difference between simple interest (SI) and compound interest (CI) for the period from March 1, 2020 to August 31, 2020, in the form of an ex gratia payment to specific categories of borrowers. This category includes borrowers (MSME, education, housing, staff, consumption and credit card) whose outstanding loan does not exceed Rs 2 crore as of February 29, 2020. In addition, the Ministry of Finance has ordered institutions to credit credit the amount in November 5.

The program will cost Rs 7,500 Crore to the National Exchequer

On October 14, the Supreme Court ordered the government to immediately implement the program as part of the RBI’s moratorium program. In addition, he said that ordinary man’s Diwali is in the hands of the government.

RBI informed the Supreme Court that a waiver of interest would cost banks around Rs 2 lakh crore. Thus, the decision taken appears to be a practical solution. In addition, credit institutions will receive compensation from the central government. As a result, it will cost the public treasury around Rs 7,500 crore.

RBI announced a loan moratorium on March 27 to ease stress on the economy hit by Covid. Banks duly implemented the EMI deferral regime; however, they did mention compound interest on the unpaid amount.

The program for all

The regime does not take into account the moratorium time that the borrower has availed himself of. Thus, whether the borrower has made use of the moratorium in part (say three months) or in full (six months), each borrower’s account will be credited.

Overall, with the government taking on the burden of waiving interest, the prolonged uncertainty on the issue has ended.

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