FAQs on refund of interest on interest

-Financial Services Division (finserv@vinodkothari.com)

The Supreme Court of India (‘SC’ or ‘Court’) had given its judgment in the matter of Small Scale Industrial Manufacturers Association vs UOI & Ors. and other connected matters on March 23, 2021. The said order of SC put an end to an almost ten months-long legal scuffle that started with the plea for a complete waiver of interest but edged towards waiver of interest on interest, that is, compound interest, charged by lenders during Covid moratorium.  While there is no clear sense of direction as to who shall bear the burden of interest on interest for the period commencing from 01 March 2020 till 31 August 2020. The Indian Bank’s Association (IBA) has made representation to the government to take on the burden of additional interest, as directed under the Supreme Court judgment. While there is currently no official response from the Government’s side in this regard, at least in the public domain in respect to who shall bear the interest on interest as directed by SC. Nevertheless, while the decision/official response from the Government is awaited, the RBI issued a circular dated April 07, 2021, directing lending institutions to abide by SC judgment.[1] Meanwhile, the IBA in consultation with banks, NBFCs, FICCI, ICAI, and other stakeholders have adopted a guideline with a uniform methodology for a refund of interest on interest/compound interest/penal interest.

We have earlier covered the ex-gratia scheme in detail in our FAQs titled ‘Compound interest burden taken over by the Central Government: Lenders required to pass on benefit to borrowers’ – Vinod Kothari Consultants>

In this write-up, we have aimed to briefly cover some of the salient aspects of the RBI circular in light of SC judgment and advisory issued by IBA.

FAQs

(updated based on the IBA Advisory dated April 19, 2021)

Applicability on Lenders:

1. Which all financial institutions are covered by the RBI Circular?

The RBI Circular is directed to the following lenders :

  • All commercial banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks)
  • Co-operative Banks- Urban Co-operative Banks,  State Co-operative Banks and District Co-operative Bank
  • All India Financial Institutions
  • All Non-Banking Financial Companies (including Micro Finance Companies, systemically important NBFCs, non-systemically important NBFCs and Housing Finance Companies)

2. What exactly is the relief to be given?

The Relief is that the lender is supposed to reverse the compound and/or penal interest/penalties, actually charged from the borrower, for any failure to pay, delay in payments, or missing installments [Payment Gaps] covered by the moratorium if availed, by the Borrower, during the Moratorium Period, that is, 1st March 2020 to 31st August 2020. The Relief presupposes the following: (a) There are any Payment Gaps during the Moratorium Period; (b) There is any compound interest, penal interest or penalty charged, for the Payment Gaps; (c) The compound interest, penal interest, or penalty pertain to the Payment Gaps.

Thus, the compound interest and/or penal interest charged, explicitly or implicitly, during the Moratorium Period, for Payment Gaps, will be replaced by simple rate of interest, at the rate contractually fixed between the parties.

3. How exactly is the relief to be given?

The Relief may be given by either refunding the amount of relief to the Borrower, or adjusting the same against any dues payable by the Customer. In case there are any payments already due, that is currently payable, the Lender generally has the right to appropriate the amount payable to the Borrower against amounts which have already fallen due under the facility.

4. I was not a party to the litigation in the Supreme Court, and therefore, can it be contended that the SC has passed an order against all financial institutions, even if they were not before the Court, and therefore, had no opportunity to make or plead their case?

Pursuant to the Supreme Court Order, the RBI had issued a circular on April 7, 2021 directing all lending institutions (specified above) to abide by the instructions of the SC. Hence, irrespective of a lending institution being a party to the SC order, the RBI Circular is intended to be implemented uniformly by all lending institutions.

Of course, it remains a contentious question as to who shall take the burden of the Relief – whether the lending institution itself shall bear it, or lay the claim on the government. Pending clarity on that, we are assuming that the lending institution will have to shoulder the burden of Relief.

5. I am an investment company; I don’t have loan transactions with the public. Am I covered by the RBI Circular?

Pure Investment Companies, though registered as an NBFC, may not be carrying out lending activities. Hence, there does not seem to be any actionable on their part under the RBI Circular.

6. I am an NBFC; my borrower has given an explicit waiver that the borrower does not want to avail the benefit of Relief on compounding interest. Do I still have to give that relief to the borrower? Can my policy, for example, say that the benefit of compound interest relief will be given to all borrowers, except those who have explicitly waived off their right to the same?

The benefit under Supreme Court order is to be extended to all the Eligible Accounts (covered in FAQ 8) uniformly. The burden of refunding the interest on interest amount to the customer, is on the lender. It seems counter intuitive that a Borrower will waive off what is clearly for relief to the borrower. Such waiver by the borrower will give rise to apprehension of use of pressure tactics.

7. I am a retail lender and none of my borrower accounts had outstanding loan facilities of more than 2 crores as on 29 February 2020. I have already extended the interest on interest benefit to my customers under the ex-gratia scheme. Do I still have to comply with the actionables under the RBI Circular?

In cases where the outstanding amount for all the loan accounts of the lender were below  2 crore as on 29 February 2020, there may be 2 reasons why the 7th April circular may still have to be complied with:

  1. The benefit was not extended to a Borrower, though the Borrower was eligible for the same.
  2. The benefit was not extended to a Borrower, if the Borrower belonged to the classes which were not eligible for the relief under ex-gratia owing to aggregate exposure of such borrower to all the lenders being more than Rs. 2 crore.
  3. The manner of computation of the ex gratia, and that the Relief, are also different. However, in case of the facilities which were covered by the ex gratia scheme, quite likely, the amount of relief given by way of ex gratia (since it did not capture any payments made during the Moratorium Period) may be higher than the Relief computed under the present circular.

Hence, a Lender may see whether there is any actionable, including any provision to be made in the financials of 20-21.

7A. Fintech Platform is managing the collections for lending partners and collecting some late fee on overdue amount which is revenue for platform and not passed on to the lending entity, do we need to refund that?

The obligation of providing the Relief under RBI circular is on financial entities such as NBFCs/banks. A fintech platform provides collection and sourcing services to their partner lenders and in this regard may charge a fee (including penal fees) from the Borrowers.. However, the fintech platform (not registered as NBFC) is not covered under the RBI Circular and hence, there is no question of refund of such fees charged by the platform.

Facility Covered

8. Which all classes or categories of loans/facilities are eligible under the RBI Circular?

All “standard accounts” have to be given the benefit of relief. The determination date for this purpose is 29th Feb., 2020. That is, the days past due (DPD) status should be less than 90 DPD as on 29.02.2020 (“Eligible Accounts”). While NPA classification is mostly done on account of DPD, there should not have been any other reasons for which the account was classified as an NPA as on 29 February 2020.

Thus, facilities/accounts not eligible for Relief under RBI Circular:

  • A facility other than a loan or working capital facility, for example, factoring transaction, leasing transaction, investment in debt security, etc.
  • Accounts classified as NPA as on 29 February 2020.
  • Loan facilities which were charged with simple interest.
  • Accounts which have already been refunded interest on interest under ex-gratia scheme
  • Non-Funded facilities (bank guarantee, Letter of Credit), etc.

8A. Does the benefit under the RBI Circular also be available to issuers of NCDs or such other debt instruments?

The idea is to provide the benefit to borrowers who have availed a loan or credit facility. In our view, debt securities are not covered under the purview of the RBI Circular.

9. Are non-performing assets as on 1st March 2020 ineligible for the Relief?

The IBA Circular creates a confusion by use of the following expression: “NPA Accounts as on 29.02.2021 (presumption being no interest or no compound interest is changed in case of NPA accounts).

The presumption that compound interest is not charged on NPA accounts is fallacious. While interest is not accrued for accounting purposes, contractual right of the lender to charge interest continues even while the loan is an NPA.

However, the question is, was an NPA borrower actually eligible to avail the moratorium at all? The intent of the moratorium was to grant relief against difficulties arising due to the pandemic and not to help/support those accounts which had become NPAs even before the onset of the pandemic.

9A. If the exposure is marked NPA by an NBFC-SI (90 day NPA), does that become NPA for an NBFC-NSI as well (180 day NPA)?

The classification of a loan account as NPA, as per the applicable RBI norms, in the books of the respective lender,as per regulations applicable to such lender, is to be considered for determining the eligibility of availing benefit under the RBI Circular. Therefore, the threshold for determination of NPA status will be 180 days in case of NBFC-NSIs.

9B. If an exposure was standard on 29 Feb 2020 but became NPA in the next few months, do we still need to refund? 
To determine the eligibility the account must be a standard asset as on Feb 29, 2020. Hence, yes, the account referred to above will qualify. However, the refund shall be calculated based on the fact that compound interest/interest on interest/penal interest has been applied during the Moratorium Months.

10. In case the lender is collecting EMIs and not charging any penal interest, will such loans be eligible for Relief?

The language of the RBI Circular para 2 is that all lending institutions shall immediately put in place a Board-approved policy to refund/adjust the ‘interest on interest’ charged to the borrowers,irrespective of whether moratorium had been fully or partially availed, or not. The RBI Circular intends to provide a relief on ‘interest on interest’ charged to the borrowers during the moratorium period, i.e. March 1, 2020, to August 31, 2020. That is to say, the intent of the RBI, following the directive of the SC, seems to give relief to a borrower who has been charged compound interest during the Moratorium Period.

Now, assume the following situation: A borrower did not avail of the moratorium, and was regularly paying loan instalments, and interest on the outstanding principal during the Moratorium Period. As there were no instalments that were overdue during the period, the question of the lender charging any interest on interest did not arise. Interest was being charged, but that was on the outstanding principal. Hence, if no compound interest has either been charged or posted to the account of the borrower, no benefit/refund is applicable to such borrower.

10A. What about the loan facilities disbursed on no-cost EMIs?

In cases where there is no rate of interest being charged by the Lender, the question of giving the relief does not arise. The contractual rate of interest was zero, however, if on missing payments there was a penal interest/penalty charged during Moratorium Period, in all such cases such penal interest/penalty should be refunded.

10B. In cases a lender charges penal interest over a normal rate, i.e. a combined rate (normal rate + additional charge) on amounts overdue. Will only the “additional” component be reversed and the normal interest continue?

The additional rate charged by the Lender is in form of a penalty, and hence entirely refundable if charged during the Moratorium Period. Further, with respect to the normal interest charged to the borrower during the Payment Gaps, there is an element of interest on interest being charged. Therefore, the interest on interest component on normal rate must also be refunded.

11. In the answer to the question immediately above, will it make any difference if the loan agreement provided for payment by EMIs rather than by equal instalments of principal or interest?

In EMIs too, the interest is inherently computed on outstanding principal (POS), and as there was no deferral of payments by the borrower, there was no interest on interest charged during the Moratorium Period.

12. Para 1.1 of the IBA Circular dated April 19, 2021  says : “where compound interest/interest on interest/ penal interest for non-payment/delayed payment was applied during moratorium”. This seems to imply that the relief is applicable only where (a) there has been a non-payment or (b) there has been a delayed payment during the Moratorium Period. In line with the SC ruling, the non-payment or delayed payment may either be covered by the mutual moratorium, or there may not have been a moratorium and still there may be a delay in the payments.

In essence, it seems from the reading of the IBA Circular that there are 2 conditions to be satisfied to grant the relief:

There was:

  1. Either a delayed payment or non-payment during the Moratorium Period, or there was a moratorium period availed and granted, and therefore, the compound interest was imposed on the restructured payment schedule
  2. And, the Lender has charged either compound interest or penal interest or both on account of either the delay, or non-payment, or shifting of payments due to the Moratorium.

Is it a correct interpretation to say that the relief under the IBA Circular is not applicable where the first or the second condition is not satisfied?

Yes, this understanding is correct. In fact, it becomes even clearer by reading the “remarks” column against entry 1, where it says, “Account eligible for refund only if compound interest/interest on interest/penal interest has been applied during the moratorium.” A similar comment appears against entry 2: “Accounts where compounding interest/interest on interest/ penal interest for non-payment/ delayed payment has not been applied during the moratorium will not be eligible for refund of interest.”

13. The facility in question did not have any payments due during the Moratorium Period. As there was no payment due during the Moratorium Period, the question of any compound interest or penal interest charged during the Moratorium Period, for payments delayed or failed during such period, does not arise. The following are some examples:

a) A loan was extended on 1st Jan., 2020 and the installments began from 1st October as the loan was under original moratorium. 

b) A loan was given on 1st Jan., 2020 but a bullet repayment at the end of 1 year. 

In both the cases, the intrinsic computations involve compound interest but as there was no failure to pay or delay during the Moratorium Period, there was no implication on any of the payments to be made by the borrower. Further, since no payments were due, the question of any moratorium did not arise.

In these cases, is it correct to contend that the 7th April circular does not apply?

Yes. As there is no case of delay or failure to pay during the moratorium period, there is no case for applying the 7th April circular.

14. The loan was standard as on 1st March, but was already 60 DPD as on that date. Hence, the overdue instalments were already attracting a penal rate, say at the rate of 24%. From 1st March to 31st August, can such penal interest, on instalments due and payable before 1st March, 2020, continue?

While it is possible to have a different interpretation, the intent of the SC ruling and the RBI Circular is that the time clock had stopped during the moratorium. The borrower could not pay till 1st March 2020 – that was a case of failure to pay. However, during the moratorium period, it was a case of inability to pay due to a supervening difficulty. Hence, neither compound interest nor penal interest can be charged during the Moratorium Period.

There is no bar, however, on the Lender enforcing either compound interest or penal interest, for Payment Gaps before or after the Moratorium Period. That is to say, if there is a penal interest applied already before 1st March for the payments due during that period, the same will still be payable.

15. In case a lender does not charge compound interest on loan, will such loans still be eligible for refund/adjustment?

In cases where the lender does not charge compound interest on its loan facilities, this essentially means that there is no compounding of the principal amount by such lender over the tenure of such loan. Hence there is no question of refund of interest on interest on such loan facilities. However, if any penal interest has been charged with respect to such loan facilities, during the moratorium period, the same is liable to be refunded.

16. In case a borrower did not avail the moratorium in respect to the loan facility and such borrower defaulted on its EMI during the moratorium period, will such borrower be covered under the RBI Circular?

The refund of interest on interest is available to the Borrower under RBI Circular, irrespective whether the moratorium has been availed or not by such Borrower.  A Borrower who did not avail the moratorium and subsequently defaulted on its EMI.

Then in such cases:

  • Either the account is subjected to penalty on its EMI after such default by the customer, OR
  • In case no penalty is charged, even in such a case EMI includes a compound interest component

Therefore, in cases where penalty is charged during the moratorium period all the amount towards penalty including interest on such penalty (if any) should be refunded/adjusted by the lender in addition to the differential amount payable in respect to interest on interest ( Six months compound interest on amount outstanding as on 29.02.2020 minus simple interest on amount outstanding as on 29.02.2020).

17. Will guarantee arrangements be covered under the RBI Circular?

Guarantee is an unfunded support. Hence, there is no question of any payments due, except for payments by way of guarantee commission.

The IBA clarification dated 19 April 2021 clearly provides in its annure 1 column 2 that non-funded facilities are not eligible for refund.

Note that guarantee commission is not subject to a moratorium

18. Will it make a difference if the guarantee has been invoked and become a funded facility?

If the guarantee is already a funded facility, on account of the guarantee having been invoked, it will certainly be covered by the Circular.

18A.  There was no moratorium extended to the customer and the customer defaults in any of its EMIs, a cheque/NACH bounce charges was levied on the customer. Will such bounce charges also be refunded under the RBI Circular?

The bounce charge may be contended as compensation for the charges to be borne by the lender due to the bouncing of the cheque – banks typically do impose such a charge. To the extent the bounce charges are compensatory, the same is not in the nature of a penal interest and hence may be recovered from the borrower. However, typically, a lender may impose a cheque bouncing charge which is deterrent/penal, and substantially in excess of the payment made to the bank by the lender. Such charges can be said to be in the nature of penal charges and hence, the same must be refunded.

19. Will the accounts not eligible for benefit under the ex-gratia scheme, qualify for the refund of interest on interest under RBI Circular? 

The ex-gratia scheme excluded certain accounts out of its ambit, such as agricultural and allied activities loans including tractor loans. The RBI Circular makes no distinction on such basis, hence interest on interest benefit should be passed to all the Eligible Accounts even if they were ineligible earlier under the ex-gratia scheme.

20. Will the loan facilities by banks to NBFCs/HFCs qualify for the refund of interest on interest under RBI Circular? 

The RBI Circular does not distinguish the loan accounts on the basis of end-use or the purpose of the loan account. Therefore, Eligible Accounts should also include loan facilities extended by banks to the NBFCs/HFCs, or loan facilities by one NBFC to another NBFC provided there was delay or failure to pay during the moratorium period and interest on interest or penal interest was charged.

 

Borrowers covered

21. Which all borrowers are eligible to be benefitted under the RBI Circular?

All borrower accounts that are eligible, have aggregate fund based activities with all the lenders of Rs. 2 crore and above and below. Subject to following conditions:

  • Such accounts were not NPA as on 29 February 2020
  • The interest/EMI on the borrower account is based on compound interest
  • Interest has been charged on such interest/EMI payment during the moratorium period, either penal interest for delayed payment or non-payment has been charged on such interest/EMI.
  • No refund of interest on interest was provided under the ex-gratia scheme to such an account.

22. In case an Eligible Borrower was not extended the benefit under the Ex-Gratia Scheme due to any reason, (such as non availability of bank account details for borrowers whose loan account have been closed), can the borrower avail the benefit under the RBI Circular?

All the Eligible Accounts of the Borrowers should be entitled to refund/adjustment of interest on interest under the RBI Circular, even if no benefit to such accounts was granted under the ex-gratia scheme.    

22AWhat if the ex-gratia amount was paid to the borrower, however there was no refund of penal charges imposed on such account, will such account, still be eligible for refund under RBI Circular?

If the ex-gratia amount has been refunded to the borrower under the ex-gratia scheme, and such account was charged with penal interest, the same shall be covered under RBI Circular. The Lender should refund amount to the extent of penal interest charged from borrower during Moratorium Period.

23. What will be the eligibility of a borrower who has not availed any moratorium?

The fact that the borrower has availed the moratorium, or not, is inconsequential for the purpose of RBI Circular. All Eligible Accounts, whether moratorium was availed, or not, are entitled to refund of interest on interest for the period commencing from 01-03-2020 till 31-08-2020, provided there was delay or failure to pay during the moratorium period and interest on interest or penal interest was charged.

23 A. In case a borrower was extended a loan after March 1, 2020 and was also extended the moratorium benefit (based on the intent of RBI relief to cover all borrower impacted due to the pandemic), will such borrower be eligible to avail the refund of interest on interest?

The RBI Circular and IBA Advisory specifically covers only such borrower accounts that were standard as on 29.02.2020. In case the account was not in existence as on 29.02.2020, the question of the same being standard or NPA as on 29.02.2020 does not arise. In such a case, a view might be taken that the benefit of refund of interest on interest shall not be extended to such loan accounts.

23 B. Will the response be the same in case the moratorium was a part of the loan terms itself?

We are referring to a loan holiday or moratorium which was contractually there, and therefore, there were no payments the borrower was supposed to make during the Moratorium Period. Hence, there is no question of any Payment Gaps, and hence, no question of any relief. The implicit compounding of interest during the Moratorium Period is a part of the loan payment structure itself, and not a burden imposed on the borrower for Payment Gaps due to pandemic.

Applicability in case of Direct Assignment, securitisation and partial credit guarantee transactions

23C. Is the provision for Relief applicable in case the loans have been assigned by way of a direct assignment transaction? In that case, who will take the burden – the assignor, the assignee or the two of them in proportion to their share in the principal/interest?

We have discussed, in our earlier write ups on moratorium, that there is no reason to discriminate between borrowers who loans are still on the balance sheet of the lender, and the loans assigned by way of DA, securitisation or similar transactions, particularly when the assignment was done without the concurrence of the borrower. Therefore, the benefit of the relief will have to be granted to the borrower  in case of DA transactions too.

The question of burden of relief depends on who has taken the compound interest in case of any failed payments during the moratorium. In a manner of speaking, the Compound Interest Relief is a court-insisted modification of the contractual right of the lender to charge compound interest on failed payments. The Hon’ble apex court has replaced such compound interest to simple interest. Hence, the Relief is nothing but a partial waiver of the comp0unded interest. So, the burden will be taken by the one who has got the compound interest on the failed payments. While technically, DA transactions are expected to work on pari passu sharing of risks/returns, practically, the way it happens in India in most cases is that the assignee gets a stated rate of interest on the actual amount of principal share outstanding. Thus, while the sharing of principal happens on pari passu basis, the interest split continues to differ from month to month (which, in our view, unfortunately, is not keeping in line with the intent of DA transactions).  If the assignee has simply got the contractual rate of interest on principal outstanding, the assignor should take the Compound Interest Relief.

23D. Is the provision for Relief applicable in case the loans have been securitised? In that case, who will take the burden – the assignor, or the investors in the PTCs? Also, does the assignor have to get the consent of the trustee/investors?

The rationale as to why the answer to the question on the applicability of the Relief in case of securitisation transactions is the same as in case of DA transactions.

Since the Compound Interest Relief is, effectively, a partial modification of the excess spread, it should come from the same. However, in our view, even though the hit is taken by the lender/assignor, the consent of the assignee or the trust is still required, as the excess spread is the credit enhancement of the assignee, and the Relief reduces the extent of credit enhancement.

23E. Is the provision for Relief applicable in case the loans have been assigned under partial credit guarantee scheme?

The rationale as to why the answer to the question on the applicability of the Relief in case of PCG transactions is the same as in case of DA transactions above. The hit, of course, is taken by the assignor or assignee depending on who was sweeping the excess spread.

23F. Is the provision for Relief applicable in case the loans originated under co-lending transactions?

Our answer is in the affirmative. The burden will be shared by the two co-lenders based on their respective contractual interest rates.

23G. When co-lenders are not agreeing to refund to all borrowers, is the primary sourcing NBFC liable for the share of the co-lender? Who shall handle the customer’s escalations?

The refund is not based on the concurrence of the lenders, since the same is directed by the regulator. In case the borrower is eligible, there is no reason why the refund shall not be processed.

Taxation Aspects

23H. What will be the implication on TDS already deducted due to such post facto reliefs?

If the borrower was liable to deduct tax at source, and the borrower deducted TDS, the same shall be factored for the payments due by the borrower during current F.Y. 2021-2022, in the month whenever the relief is granted. Since there is reduction of payments due and payable by the borrower, there would be a netting effect of TDS to be deducted by the borrower.

23I. Is the refund of interest on interest deductible as an expense, because normally if it is created as a provision, it may not be deductible?

While termed as a provision, but in essence, the relief is not in the nature of a “provision” as understood in accounting parlance. It is not for an estimated liability. It is actually a rebate or a relief, and is therefore, tax deductible.

Computation

24. How will the computation of the relief be done?

(a) Identify the sums which have been failed or delayed during the Moratorium Period (Unpaid Amounts).

(b) Compute, based on actual rate charged, the compound interest and/or penal interest (Actual Charge) on Unpaid Amounts.

(c) Compute, on Unpaid Amounts, simple interest at the contractual rate of interest. Note that the contractual rate of interest may itself be a compound rate. There is no need to transform the compound rate into an equivalent simple interest rate. The compound interest rate itself may be applied on a simple interest basis.

(d) The difference between step (b) and (c) is the Relief.

25. On what date is the Borrower entitled to get the benefit of the Relief? If the credit of the amount of Relief is to be given at the end of the Moratorium Period, then the compound interest charged on an amount equal to the Relief may have extended beyond the Moratorium period too. 

In our view, the intent of the SC ruling followed by the RBI Circular is that the compound interest ought not have been charged at all during the Moratorium period. If the compound interest has been charged during the Moratorium Period, it will obviously have an impact after the moratorium period too. In our view, the credit, therefore, has to be given at the end of the Moratorium Period.

If the benefit of the Relief is given by crediting the customer’s account in the month of April or May, there will be an interest on interest on interest (that is, interest on the Relief amount itself) for the months from Sept. 2020, to whenever the actual credit is given. The impact may not be sizeable, but in principle, the question is – whether a lender can charge interest on what is actually refundable to the borrower?

Another view is that SC ruling specifically mentions either refund of the differential amount or adjustment in the next instalment, meaning thereby that there is no need to travel back in time to Sept., 2020, and credit the differential on that date. May be, this is a nuance that was possibly not realised at the Apex court level.

26. On what rate of interest will the difference between compound interest and simple interest be calculated?

The difference between the compound interest and simple interest shall be calculated on the contractual rate (loan agreement rate) between the lender and borrower as on 29 February 2020.

27. Will there be any refund/ adjustment in case the contractual rate of interest is 0%?

In case the contractual rate is NIL or 0%, there is no question of granting any benefit to the borrower, given that the borrower has not paid any interest at all.

27A. What happens in case the loan is under moratorium, and the interest is capitalised on due date. There are partial payments received subsequently during the 6 month period – either during moratorium or thereafter, taken as principal repayment. The borrower has already got an interest benefit out of the repayment. Does that repayment get reduced first from the capitalised unpaid interest, for this purpose? Else it is double benefit.

In case there is a Payment Gap during the Moratorium Period or interest component is capitalised by the Lender, relief shall be provided. The computation of relief shall consider any repayments or prepayments during the Moratorium Period. The reference to Moratorium here does not include any contractual moratorium that was a part of the original loan contract itself.

27B. If the loan was given, say, on 1st Jan. 2020, and originally had a payment holiday/moratorium, say till 1st Oct. 2020. The accrual of interest during this time has been auto-compounded in the computation of EMIs. Is there a need to refund such interest on interest as well?

No. The whole genesis of the Circular is the compound interest charged for Payment Gaps, that is, failure to make any payment or Covid-induced moratorium. As per facts in the query, the loan originally did not have any payments due during the Moratorium Period. Hence, the question of any Covid disruption did not arise, and therefore, there was no compound interest imposed for any failure to make payments during the disruption period.

Accounting Provision

28. What is the exact manner of passing on the benefit to the borrower? Is it merely a credit to the account of the borrower, or does it lead to any cash benefit being transferred to the borrower?

The benefit has to be passed on to the borrower by either adjusting the differential amount with the future payables by the borrower or in case the loan account has been closed, the amount shall be refunded to the borrower. In either case, the lender is required to create a provision in its books of accounts for the financial year ending March 31, 2021.

29. When is the impact of such relief to be recognised in the books of accounts of the lender?

As per the RBI Circular, lending institutions shall disclose the aggregate amount to be refunded/adjusted in respect of their borrowers in their financial statements for the year ending March 31, 2021.

30. In case the financials of a lender have been approved by the Board before the IBA circular dated April 19, how will the provisioning be done?

The RBI circular was issued on April 7, 2021 which specified the requirement to disclose the amount of relief in the financials for the year ending March 31, 2021. Further, the IBA Advisory laid down the methodology for computation and issued the same on April 19, 2021. Although it is recommended that the computation of the differential amount should be done for each borrower. However, in such cases where the financials have been finalised during April itself, an enterprise-level or portfolio-level computation may be done and provided for. This may however lead to a difference between the provision and actual liability.

 

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12071&Mode=0

6 replies
  1. Lokesh
    Lokesh says:

    1. What are the categories of loan where interest on interest/ compound interest on loan for the moratorium period is to be refunded ?
    2. Whether RBI instructions are applicable for MSME loans and other loans like Education loan, housing loan, consumer loan, Credit card dues, Auto loan, Personal loans ?
    3. Is it applicable for large corporate loans where moratorium was granted for the period from 1.3.2020 to 31.08.2020 ?

    Reply
    • Kanakprabha Jethani
      Kanakprabha Jethani says:

      1. Refer Q.8 to the FAQs
      2. Under ex-gratia scheme there was a list of eligible categories of loans prescribed. However, under this circular, there is no such category of loan prescribed. Hence, all types of loans meeting the eligibility criteria detailed in Q8, shall qualify.
      3. The Supreme Court verdict clearly mentioned that the limit of Rs. 2 crores should not be there. Hence, large corporate borrowers shall be eligible under the scheme, provided they meet the eligibility requirements.

      Reply
  2. rashmi
    rashmi says:

    Account eligible for refund only if compound interest/interest on interest/penal interest as been applied during the moratorium.

    Will this cover all 6 months or the period in which morat is taken

    Reply
    • Anita Baid
      Anita Baid says:

      Irrespective of the moratorium being availed, the relief has to be provided for the entire 6 months- in case there are any Payment Gaps and any penal interest or interest on interest has been charged during the said period.

      Reply

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