To bring some relief to millions of borrowers from the financial institutions, the Finance Ministry has rolled out a much-anticipated scheme for grant of Ex-gratia payment to provide an interest compounding relief for the six-month moratorium. The government, on October 23, announced an ex-gratia waiver of interest scheme to assist the borrowers in facing financial difficulties during the pandemic time. This scheme has been introduced to mitigate the after-effects of the covid-19 pandemic, with the object to provide the ex-gratia payment of the difference between compound interest and simple interest for six months to the borrowers in their specified loan accounts.
The relief is provided for the period from March 1, 2020, to August 31, 2020, to the borrowers in their specified loan accounts. Such relief will be equivalent to the compound interest and simple interest for six months.
The scheme for grant of ex-gratia payment will cover the borrowers who have loan accounts having sanctioned limits and outstanding amount not exceeding Rs. Two crores as of 29.02.2020. Further, such a loan should not be a Non-Performing Asset (NPA). This scheme will not be available to the loan defaulters on or before February 29, and it will not be available to the loan on the fixed deposits. In the wake of the scheme for grant of ex-gratia payment, the lending institutions have been asked to credit the amount in the bank accounts of the borrowers by November 5.
Key Ingredients of Scheme for Grant of Ex-gratia Payment
The scheme for grant of ex-gratia payment is also known as the waiver of ‘interest on interest’ scheme. The scheme mandates the ex-gratia payment to specific borrowers’ categories by crediting the difference between simple interest and compound interest between March 1, 2020, to August 31, 2020, by the respective lending institutions. Under this scheme for grant of Ex-grantia payment, the loans eligible include education loans, credit card dues, automobile loans, MSME loans, consumption loans, professional loans, and personal loans. The accounts must not be under default, and it should be standard as of February 29.
The scheme for grant of ex-gratia payment will benefit the borrowers who have availed the moratorium either fully, partially, or not at all. Even if someone has not opted for a loan moratorium, he will be eligible under this scheme. Besides this, due to the COVID-19 lockdown, those who have not opted for a moratorium will be eligible for an ex-gratia payment or cashback.
After crediting the stated amount in the respective accounts of eligible borrowers, the lending institutions can claim reimbursement from the Central government through the nodal agency of the State Bank of India.
The Scope of Ex-gratia Scheme
The basic idea behind creating the scheme for grant of ex-gratia payment is to provide the benefit of paying the simple interest by the borrowers covered under this scheme in the view of the COVID-19 pandemic. The scheme’s underlying philosophy is to grant some relief to the smaller borrowers whose business or the pandemic disrupts earnings. As the pandemic has created a huge loss to the people and to fill the gaps in their earning, this scheme’s central purpose is to provide them with some relief. But, such a grant of the moratorium will not provide any relief from payment of the interests.
This scheme for grant of ex-gratia payment transforms the compound interest into simple interest during the moratorium period. The applicability of the scheme is not optional but mandatory. The lending institutions are under an obligation to extend the benefit of the ex-gratia scheme to the eligible borrowers, as mentioned above. In co-lending, the benefit under this scheme shall be extended by taking a blended interest rate. The two crore limit will apply to all the borrowings across all the lending institutions.
Benefitting the Specified Borrowers
The loans for consumption (social ceremonies, personal expenditure, marriage, etc.) are eligible to be covered under this scheme. The agricultural loans will not be covered under the scheme for ex-gratia payment; however, the tractor loans may qualify under the Automobile loans category. Recomputation of the loan obligations is not covered under this scheme. The benefit under this scheme will not be called for in case of a loan where the terms of the loan are clear that the interest shall be simple.
The ex-gratia scheme’s objective is to give the differential benefit of compound interest and simple interest to the specified borrowers. The scheme is in the form of a waiver of interests in interest in the specified borrowers’ loan accounts. There is no actual transfer of cash in the bank account of borrowers. The refund will get provided only if the loan’s outstanding amount is less than the differential amount or if the account is fully squared.
Eligibility Criteria for the Scheme for Grant of Ex-gratia payment
The following segments or classes of loans are eligible for the scheme for grant of ex-gratia payment:
Conditions and Stipulations on the Aforesaid Eligibility
The above eligibility shall be subject to the following conditions and stipulations:
- The loan should not be Non-Performing Assets (NPA) as of 29th February 2020.
- The ex-gratia payment will be admissible even if the borrower has fully availed, partially availed, or not availed the moratorium on repayment announced by RBI.
- The lending institution must be either a banking company, or a public sector bank, or a Regional rural bank, or a Non-Banking financial company or a public sector bank, or a Housing Finance company registered with Reserve Bank of India or a National Housing Bank.
Calculation of Interests
The interest rate for education loans, housing loans, Automobile loans, consumer loans, and personal to professional loans shall be the contracted rate as specified in the loan agreement or documentation.
For the consumer durables loans, the rate of interest for calculating the difference between simple and compound interest shall be the contracted rate, which gets specified in the loan agreement or documentation. In the case where there is no interest get charged on the Equated Monthly Installments (EMI), for ex-gratia payment, the interest will be applicable at the base rate or Marginal cost of funds based upon the Lending Rate, whichever is applicable.
In the matter of the credit card dues, the rate of interest shall be the Weighted Average Lending Rate (WALR). The cardholder will charge such interest for the transactions financed based on EMI from its customers from March 1, 2020, to August 31, 2020.
How to Calculate the Simple and Compound Interest for the Scheme for Grant of Ex-gratia Payment?
The Education loan, Housing loans, Credit card dues, Auto loans, Consumer durable loans, and consumer loans are in the form of term loan or Demand loan, the outstanding in the account will be the reference amount for the Term loans on which the simple interest, as well as compound interest, will be calculated at the end of 29.02.2020.
The repayments in the loan accounts during the period to be reckoned will not be taken into consideration while making such calculations. Adopting this approach will bring uniformity in all the lending institutions for all the borrowers, irrespective of whether they have fully availed, partially availed, or not availed of the moratorium on repayment of the loans announced by RBI. Due to the absence of a uniform rate, the WALR will be utilized as the benchmark rate.
Processing of the Claim by Lending Institutions
Only after crediting the ex-gratia amount in the bank accounts of respective borrowers, the lending institutions can claim for the reimbursement by December 15. A statutory Auditor will have to pre-audit the lending institution’s claim, and such a certificate has to be attached to their respective claims. The nodal agency for the scheme will be the State Bank of India. And it will receive funds from the central government for settling the claims.
Features of the scheme for grant of Ex-gratia Payment
Following are the main features of the scheme for grant of ex-gratia payment:
- The loan accounts as of 29.02.2020 should be standard in the books of the lending institutions.
- The refund period shall be from 1st March 2020 to 31st August 2020, which is a total of 6 months.
- The following segments are covered under the relief- MSME loans, Housing loans, Education loans, Credit card dues, Consumer durables loans, Automobile loans, personal loans to professional loans, and consumption loans.
- The loan accounts with sanctioned limits and outstanding must not exceed Rs. 2 crores as of 29.02.2020.
The Grievance Redressal Mechanism of the scheme for grant of Ex-gratia Payment
All the lending institutions must put in place a Grievance Redressal Mechanism for the eligible borrowers. This grievance redressal mechanism will help the borrowers in the redressal of their grievances within one week from the issuance date of the guidelines. Such grievances of the lending institutions will be resolved through a designated cell at the State Bank of India after consultation with the Ministry of Finance, Government of India.
Ex-gratia Payment Subject to Income Tax
The ex-gratia payment amount will be treated as an income and will get taxed at a normal slab rate applicable to the individual. There will be no impact of this scheme on the Banks, NBFCs, and lending institutions. The government will reimburse the amount credited by them in the borrowers’ bank accounts, which is expected by December 15.
The benefit of Scheme for Grant of Ex-gratia Payment
By introducing the scheme for grant of ex-gratia payment, around Rs. 300 crore will flow as a relief to the MFI borrowers due to the order on an aggregate loan of Rs. 60,000 crore. The money under his scheme will not be given directly in the form of cash, but it will be adjusted in their accounts. Such benefit to the MFI borrowers will be provided to those accounts which were standard at the beginning of the moratorium period.
The Scheme for Grant of Ex-gratia Payment to cost Rs. 7500 crore
On 14th October, the Supreme Court has ordered the government to implement the scheme for grant of ex-gratia payment under the RBI moratorium scheme. This scheme will cost around Rs. 7500 crore to the National Exchequer. Such an interest waiver will cost the banks around Rs. 2 lakh crore. Besides this, the lending institutions will be compensated by the Central Government, costing Rs. 7500 crore to the National Exchequer.
Conclusion
Due to the unprecedented COVID situation, India’s Government has introduced the Scheme for Grant of ex-gratia payment. The object is to provide relief to the lenders and borrowers whose business has been struck by the global pandemic. This scheme has appeared as a ray of hope in a depressing situation like this. The scheme aims to bring financial relief to millions of borrowers from various financial institutions.
The scheme for grant of ex-gratia payment is an ‘Interest waiver scheme’. It mandates the payment of the difference between simple interest and compound interest, in the form of ex-gratia payment. This ex-gratia payment will include borrowers like MSME, education, housing, personal, credit card, and consumer. Such an outstanding loan must not be more than Rs. 2 crores.
Now, the borrowers will have to pay the interest only on the simple basis for their outstanding borrowings. It will help them to get back in the same place they were before the COVID-19 induced lockdown. Realizing such borrowers’ situations, the government has decided to make good the compounding effect by reimbursing the lending institutions.
To cheer up the borrowers’ festive spirits, financial institutions like banks have started refunding the difference between compound interest and simple interest in the borrower’s account during the moratorium period. We can say that the government, by taking the burden of interest waiver, has ended the prolonged uncertainty on this issue. Thus, the scheme for Grant of Ex-gratia payment is a ‘scheme for all’ as it does not hold into the record the time of moratorium availed by the borrower. This will, in turn, help in alleviating the stress of the COVID hit the Indian economy.
