Everything Businesses Need To Know About Interest Waiver For A Moratorium By The Government

To deal with the damaging effects of the ongoing economic crisis, the government has undertaken several initiatives to aid businesses to find their footing. Among these, one of the most crucial steps has been granting an interest waiver to eligible businesses.  Borrowers with existing loans of up to Rs. 2 crores are eligible for an interest waiver, as per a directive by the Finance Ministry. This scheme was implemented to benefit individuals who were adversely affected due to the current Covid-19 pandemic. On 14 October 2020, the Supreme Court ordered this interest waiver for individual borrowers, as well as, businesses.

What Does This Interest Waiver For A Moratorium Mean?

To appreciate this recent interest waiver, you first need to know the six-month moratorium period that preceded it. As per the earlier moratorium, borrowers were provided with a reprieve from having to bear interest payment, and principal repayment for their existing loans after the nationwide lockdown started in March 2020. During this time, businesses with outstanding loans could get away without paying monthly installments. Nevertheless, interest continued to accrue on the principal outstanding portion in these months. Moreover, this moratorium did not mean that companies could avoid liabilities for the six months. Instead, the loan tenure was extended by six months to ensure a complete repayment. However, availing of this moratorium period was optional. Companies that could afford to make regular EMI payments had the chance to avoid additional interest accrual by opting out of this moratorium scheme.

Interest Waiver Affidavit: What Does It State?

Besides the EMI moratorium on loans, the Indian government also brought in some interest reprieve for borrowers with its October directive. To appreciate this interest waiver for a moratorium, you should first assess how loan repayments normally work. Indian lenders calculate interest on term loans using the compound interest method. This compounded interest would mean businesses that took advantage of the earlier EMI moratorium would need to service higher EMIs. Such a thing would happen because of the continued accrual of interest, even during the moratorium months. To ensure that borrowers do not have to bear higher installments at the end of the moratorium, the Finance Ministry implemented this new directive. Under this scheme, businesses and individual borrowers would only need to service interest using simple interest calculation. 

Who Are Eligible To Avail Benefits Under This Interest Waiver Scheme?

The following businesses are eligible to enjoy benefits under the interest waiver for a moratorium directive.

• Borrowers of MSME loans, with outstanding principals not exceeding Rs. 2 crores.
• This outstanding will be calculated as of 29 February 2020.
• Loans, which were declared as non-performing assets, as of 29 February 2020 are not eligible for interest waiver facilities.
• The benefits are available to all borrowers, irrespective of whether they have availed of EMI moratorium fully, partially, or not at all.

If your business has serviced EMIs regularly throughout the moratorium period, you can expect an ex-gratia payment from the government. This payment will comprise an amount equal to the difference between compound interest and simple interest for your company’s outstanding dues. 

Applicable Period For Interest Waiver Scheme

Interest waiver for a moratorium is only applicable on loan interest accrued between 1 March and 31 August 2020. For instance, consider that an MSME loan accrues a compounding interest of Rs. 30784 in this particular period. Simple interest calculation shows that borrowers are liable to bear Rs. 30000 only as interest payments. Thereby, under this interest waiver facility, the business can save Rs. 784. It is also crucial for you to understand that loans, which were closed during this period, are eligible for interest waivers. However, in such cases, the waived interest would be calculated from 1 March to its closure date only, and not till 31 August. The savings from this interest waiver scheme must be credited to the concerned borrower’s bank accounts by 5 November 2020.

Who Is Not Eligible For Interest Waiver?

The following segment of individuals cannot claim any benefits from this interest waiver facility – 

• Allied activity and agriculture loans.
• Lenders with an outstanding principal sum exceeding Rs. 2 crores.
• Loans availed against gold, fixed deposits, securities, or property.
• Loans availed specifically to purchase tractors.
• Non-performing assets.

Businesses, especially micro, small, and medium enterprises can benefit greatly from this interest waiver for a moratorium. Such small organisations can expect a boost to their working capital through these savings, allowing them to function better. Moreover, they can recover from the side effects of the current economic crises with such helpful undertakings. To boost the availability of additional cash flow, such companies can also turn to other easy sources for capital, such as invoice discounting services. 

Bottom Line  

The recent declaration of the Indian government to waive interest on business loans and other financial products for the moratorium period can benefit small enterprises significantly. This facility assures considerable savings, which your company can utilise to achieve other goals.