Lenders are not sure how to treat certain categories of loans for compound interest payment. Secondly, there is no clarity on what happens if the lenders’ claim gets rejected by the government
Even as the November 5 deadline nears for lenders to make payment of difference between compound interest and simple interest to borrower accounts, some institutions are yet to communicate the details to their borrowers.
This, industry officials said, is on account of certain confusion still prevailing among lenders about the finer details of the implementation part.
What is the scheme?
Following a directive from the government, the Reserve Bank of India (RBI) had directed banks to complete the implementation of ex gratia payment of differential interest by November 5. Banks, in turn, can make their claims by December 15 at State Bank of India. Government will compensate banks.
Who can avail the scheme?
The finance ministry had clarified that loans upto Rs 2 crore under specified categories are eligible for the ex gratia payment of differential interest. These include MSME, Education, Housing loans, Consumer durables, credit card dues, automobile loans, personal loans to professionals and consumption loans.
What is the confusion?
One, the government has clarified that tractor loans and equipment loans aren’t eligible for the scheme. But, what about loans given to tractors and equipment loans for non-agricultural use?
“Not all tractors are used for farming. Some are used for construction purposes. How do we treat these loans?,” said a senior NBFC industry official. He didn’t want to be named. “Similar is the case with equipment loans and loan against property (LAP) in some cases,” the official said.
Two, what happens if the claims of the lenders made to the government by December 15 gets rejected? Lenders are supposed to make payments to the borrower accounts by tomorrow. If the claims get rejected later, lenders will have to recover the same amount from the borrower. This could lead to disputes between the two parties.
For these reasons, some lenders are yet to reach out to the borrowers yet. NBFCs are likely to write to the banking regulator and the government seeking more clarity on the issue. The case on the interest waiver issue is still going on in the Supreme Court. Next hearing is scheduled for tomorrow.
Will the deadline get extended?
Many lenders feel that the time given to make payments to borrowers is too short. “The whole process requires a lot of time—to identify the eligible borrowers and calculate the exact amount. This deadline is too short,” said another industry official who too declined to be named.
Lenders are hoping that the government and the RBI will give more time for them to implement the scheme. “One shouldn’t be surprised that if the deadline is extended,” said the second official quoted. However, till now, there is no clarity on the deadline extension from the government or RBI.
When was the moratorium announced?
The six months moratorium was announced by the Reserve Bank of India (RBI) in March to help stressed borrowers hit by the pandemic impact. But, the Supreme Court’s intervention has made the whole moratorium scheme more complicated. With the court insisting on compensating borrowers on the compound interest part, the government had to bear the burden.
What should the borrowers do now?
According to bankers and NBFC officials, if the customers who are eligible for the compound interest refund don’t get an update from the bank by tomorrow, they should get in touch with individual lenders to seek clarity. Customers can approach the customer care divisions of banks and understand the status, said a senior executive at an NBFC. He requested anonymity.
What amount will be credited to borrower accounts?
The government’s scheme essentially says that banks will credit the difference between simple interest and compound interest (from March 1 to August 31) in eligible borrower accounts. This needs to be calculated on individual accounts. The amount is unlikely to be significant as it involves only the compound interest component.
Will this amount get adjusted to the loan?
It is not yet clear whether this amount will be adjusted against the loan amount or will be credited to the borrower account separately. Individual banks will take a call after seeking consent from the borrower.
What makes you ineligible to avail the scheme?
The loans, to be eligible for the scheme, shouldn’t be a non-performing asset (NPA) as on February 29, 2020. So, if your loan is an NPA as on that date, you are not eligible for this scheme.
You haven’t availed the moratorium. Will you still get the benefit?
Yes. It doesn’t matter whether the borrower availed the moratorium for full six months, or partly availed (say for the first three months) or not availed at all. Banks will have to calculate the amount to be credited based on the rate of interest prevailing as on February 29.