Rule 251 of The General Financial Rules 2017 Interest on Loans
Original Rule Text
Visual Summary
Government prescribes interest rates for loans.
Interest is charged for payment day, not repayment day.
Pro-rata formula for interest calculation for periods less than a year.
Executive Summary
Rule 251 of The General Financial Rules, 2017 establishes the core principles for charging interest on government loans. It mandates that interest rates are to be set by the government for specific loan types. The rule clarifies that interest accrues for the day the payment is made but not for the day of repayment. Furthermore, it provides a precise pro-rata formula for calculating interest for periods shorter than a complete financial year, ensuring consistency and clarity in financial transactions.
In-Depth Analysis of the Rule
Rule 251 is a crucial provision within The General Financial Rules, 2017, as it lays down the foundational framework for how interest is to be applied to loans disbursed by the government. This rule ensures uniformity and transparency in financial dealings involving public funds.
Breakdown of the Rule
- Rule 251(1) – Prescribed Interest Rates: This sub-rule states that the interest rate for any particular loan or class of loans will be determined and prescribed by the Government. This centralizes the authority for setting interest rates, preventing arbitrary application and ensuring consistency across similar loan categories.
- Rule 251(2) – Interest Accrual Period: This part clarifies that interest is charged for the day of payment of the loan but explicitly not for the day of repayment. This distinction is important for accurate calculation of the interest period.
- Rule 251(2) – Calculation for Shorter Periods: For loan periods that are less than a complete year, a specific formula is provided:
(Number of days X Yearly rate of interest) / 365 (or 366 in case of a leap year). This ensures a fair and standardized method for calculating pro-rata interest, unless an alternative method is specifically prescribed for a particular case or class of cases.
Practical Example
Consider a government loan of Rs. 1,00,000 sanctioned at an annual interest rate of 10%. The loan is paid on May 1, 2024, and repaid on October 31, 2024. To calculate the interest:
- Number of days: May (31), June (30), July (31), August (31), September (30), October (31). Total = 184 days.
- Year: 2024 is a leap year, so we use 366 days.
- Interest Calculation: (184 days X 10% of Rs. 1,00,000) / 366 = (184 X 10,000) / 366 = 1,840,000 / 366 = Rs. 5027.32.
Thus, the interest charged for this period would be Rs. 5027.32.
Related Provisions
To fully understand the context of interest on loans, it is beneficial to refer to these related rules:
- Rule 250 of The General Financial Rules, 2017 General Conditions for Regulating All Loans: This rule outlines the overarching conditions that govern all government loans.
- Rule 252 of The General Financial Rules, 2017 Procedure for Recovery of Loans and Interest Thereon and Grant of Moratorium: This rule details the process for recovering loans and interest, and the conditions for granting a moratorium.
Learning Aids
Mnemonics
- I.L. P.D.C. R.D.D. R.P. S.P.F. – Interest on Loans: Payment Day Counts, Repayment Day Doesn’t, Rates Prescribed, Short Period Formula.
Process Flowchart
Multiple Choice Questions
1. What determines the interest rate on a loan according to Rule 251 of the General Financial Rules, 2017?
- A) The market rate at the time of sanction
- B) The rate prescribed by the Government for that particular loan or class of loans
- C) A rate mutually agreed upon by the borrower and the lender
- D) The prevailing bank lending rate
Show Answer
Correct Answer: B) The rate prescribed by the Government for that particular loan or class of loans
2. For which day is interest NOT charged on a loan as per Rule 251 of the General Financial Rules, 2017?
- A) The day of payment
- B) The day of repayment
- C) The first day of the financial year
- D) The last day of the financial year
Show Answer
Correct Answer: B) The day of repayment
3. How is interest calculated for a period shorter than a complete year under Rule 251 of the General Financial Rules, 2017?
- A) By dividing the yearly rate by 12 and multiplying by the number of months
- B) By using the formula: (Number of days X Yearly rate of interest) / 365 (or 366 in a leap year)
- C) By applying a flat rate decided by the Accounts Officer
- D) It is not calculated for periods shorter than a year
Show Answer
Correct Answer: B) By using the formula: (Number of days X Yearly rate of interest) / 365 (or 366 in a leap year)
4. If a loan is paid on April 10th and repaid on September 15th of the same year, for which day is interest charged according to Rule 251 of the General Financial Rules, 2017?
- A) Both April 10th and September 15th
- B) Only April 10th
- C) Only September 15th
- D) Neither April 10th nor September 15th
Show Answer
Correct Answer: B) Only April 10th
5. What is the primary purpose of Rule 251 of the General Financial Rules, 2017?
- A) To define the types of loans the government can offer
- B) To outline the procedure for recovering defaulted loans
- C) To establish the principles for charging interest on government loans
- D) To set limits on the maximum amount of interest that can be charged
Show Answer
Correct Answer: C) To establish the principles for charging interest on government loans
Frequently Asked Questions
Q1: Does Rule 251 of the General Financial Rules, 2017 apply to all types of government loans?
A1: Yes, Rule 251 applies to any particular loan or class of loans for which the Government prescribes an interest rate, ensuring a standardized approach across various loan categories.
Q2: How is a leap year accounted for in interest calculation under Rule 251 of the General Financial Rules, 2017?
A2: For periods shorter than a complete year, the interest calculation formula explicitly uses 366 days in case of a leap year, ensuring accurate pro-rata interest computation.
Q3: Can the government change the prescribed interest rates mentioned in Rule 251 of the General Financial Rules, 2017?
A3: Yes, Rule 251(1) states that interest shall be charged at the rate prescribed by the Government, implying that the Government has the authority to set and potentially revise these rates for different loans or classes of loans as deemed necessary.
Key Takeaways
- The Government is solely responsible for prescribing interest rates on its loans.
- Interest is charged for the day of loan payment but not for the day of repayment.
- A specific pro-rata formula is provided for calculating interest for periods less than a full year, accounting for leap years.
- This rule ensures clarity, consistency, and fairness in the financial management of government loans.
Conclusion
Rule 251 of The General Financial Rules, 2017, serves as a cornerstone for transparent and equitable financial administration concerning government loans. By clearly defining how interest rates are set, how interest accrues, and how it is calculated for partial periods, the rule eliminates ambiguity and fosters confidence in the government’s financial operations. Adherence to these principles is vital for maintaining fiscal propriety and accountability.