RBI Commands Lending Institutions to Follow Ex-Gratia Relief Scheme

Reserve Bank of India has commanded all lending institutions to pay the difference between compound interest and simple interest for six months ending August 31, 2020
  • BY Jaspreet Kaur

    Feature Writer, BusinessEx

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  • Nov 04,2020
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  • 13 Mins Read

The central bank of India, Reserve Bank of India (RBI) has lately commanded all lending institutions to pay the difference between compound interest and simple interest for six months ending August 31, 2020 to the borrowers in specified loan accounts. This notification has been rolled out after the Indian government proclaimed that November 5 was set as the deadline for returning the interest under "Ex-gratia Relief Scheme".

"The Indian government has announced 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 (1.3.2020 to 31.8.2020) (the ‘Scheme’) on October 23, 2020, which mandates ex-gratia payment to certain categories of borrowers by way of crediting the difference between simple interest and compound interest for the period between March 1, 2020 to August 31, 2020 by respective lending institutions," RBI said in its statement. 

The central bank has set an eligibility criteria under which borrowers, who loan accounts having sanctioned limits and outstanding amount of not exceeding INR 2 crore as on 29.2.2020. Loans which are eligible under ‘Ex-gratia Relief Scheme’ are MSME loans, Education loans, Household loans, Consumer Durable Loans, Credit Card Dues, Automobile loans, Personal loans to Professional, and Consumption loans.

Under the scheme, RBI would not cover loan accounts that were non-performing assets (NPA) as on 29.2.2020. 

"The benchmarks and modalities of ex-gratia payment of difference between compound interest and simple interest under the scheme would be detailed in the attached operational guidelines. The rate of interest would be prevailing on 29.2.2020 i.e. in case the rate of interest has changed thereafter, it shall not be reckoned for purposes of this computation. The payable ex-gratia amount shall have to be credited to the account of the borrower by the lending institutions as ex-gratia payment under the scheme," RBI said in its guidelines. 

Apart from this, borrowers who have availed any loan during the lockdown period will be getting an additional ex-gratia payment as per the central bank. 

"After crediting the said amount in the respective accounts of eligible borrowers, the lending institutions can lodge their claim for reimbursement latest by 15.12.2020. Claims shall be submitted to designated officers or cell at the State Bank of India," the Central bank added.

How Will Simple Interest and Compound Interest be Counted ? 

As all above-cited loans are in the form of term loans or demand loans, 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 TermLoans on which the interest (simple and compound) will be computed. 

"While doing the computation, 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," RBI stated in its statement. 

Will Borrowers be Ultimately Benefited?

Borrowers are said to be benefitted under this relief scheme. However, the actual picture is contrary to what has been shown. The amount that would be returned by the lending institutions would be treated as income of the borrowers, thereby, levying it at the end of fiscal year. 

"Cashback that would be received by borrowers will be considered as income and levied at the normal slab rate applicable. As no TDS is announced over this, a person would have to pay tax over this income. On the other hand, lending institutions would not be impacted by this scheme. Lending institutions would be reimbursed the amount that is disbursed to borrowers," Prabhjot Kaur, a practicing Chartered Accountant, told BusinessEx. 

In this way, borrowers would not be truly benefitted. The relief scheme partially benefits the borrowers as they would have to show it as an income in the next financial year. 

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