The move comes after the NCVO and the London Voluntary Service Council voiced concerns that the terms and conditions presented too much of a burden.
Reporting requirements were also simplified after the NCVO claimed they were so onerous that they effectively delayed payments and therefore breached the Compact funding code of practice, which states that payments should be made in advance.
"We'll be writing to grant recipients," said Simon Hebditch, chief executive of Capacitybuilders. "The contract could be over-burdensome and people could be raising interest from all kinds of sources. Being able to identify the amount raised from us is difficult."
Hebditch said the interest rule had been introduced earlier this year on auditors' advice in line with Treasury guidelines that prevent organisations earning interest on public money. He added that he was aware of no grant recipients that had returned interest.
The clause stated that funded groups "might be asked to pay Capacitybuilders accrued interest of more than £2,000" and stipulated that interest must be spent in line with grant purposes.
Elizabeth Balgobin, chief executive of London Voluntary Service Council, which was awarded three Capacitybuilders grants worth a total of £210,000, complained to the Office of the Third Sector. She said that charities used interest to build reserves and it was impractical to ask charities with more than one funder to calculate interest from one grant. "I'm surprised nobody in the sector noticed this sooner," she said.
Another clause had required grant recipients to provide quarterly reports explaining their activities before payments were triggered. The NCVO claimed the practice delayed payments and might breach the Compact.
A Cabinet Office spokesman said: "There is a balance to be had between accountability for public funds and burdensome monitoring. We are happy with Capacitybuilders' approach."