Interest on interest waiver: Banks start crediting accounts

RBI issued guidelines to return the interest back to the customers

Hyderabad: Various public and private sector banks have started paying the ex-gratia amount or the difference between compound interest (interest on interest) and simple interest on the principal for the six month moratorium period that the RBI has directed them to pay to the customers.

When the moratorium was announced, the banks and financial institutions have added the outstanding to the principal. As a result, those who have taken loans were paying interest on the principal taken and also interest on this interest. The issue needed the intervention of Supreme Court which said if interest on interest was levied, there would be no real benefit to the customers due to the moratorium. Following this, RBI issued guidelines to return the interest back to the customers.

Both the private and public sector banks have started returning this additional amount collected from November 5. If the interest on interest was allowed, the banks and financial institutions would have earned about Rs 6,500 crore from the loan accounts.

For instance, a customer of ICICI Bank continued to pay Rs 14,909 monthly EMI even during the moratorium period. If he were to opt for the moratorium, he would have paid Rs 494 extra for the six-month period in addition to the regular EMIs. Since the decision is reversed, he would now be required to pay the piled up EMIs.

In another case, a customer was paying Rs 3,821 as EMI for the Rs 1.15 lakh personal loan taken from Bank of Baroda. The ex-gratia amount was Rs 111.73. For uniformity, the interest on interest is not collected for all loans. Since he opted to pay the EMI regularly, the bank credited Rs 494 (which would have been the difference between the compound interest and simple interest) into his account.

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