In a massive relief to individual and MSME borrowers, the Union Government has announced a waiver of the compound interest incurred by loans during the moratorium period from March to August.
What does this mean?
In simple terms, if you have opted for the EMI moratorium, you will have to pay only the simple interest on your loan amount for the moratorium period. You don't have to pay compound interest – interest on interest, thereby significantly reducing your overall loan burden.
On the other hand, if you have paid your loan dues on time during these difficult times, you will be rewarded for your on-time payments. You will receive a cashback from your lender equal to the difference of "compound interest paid – simple interest." This cashback will be credited to your loan account before 5th November.
Continue reading to know more about this scheme, to determine your eligibility and how to benefit from it.
Overview of the Compound Interest Waiver Scheme
To help borrowers deal with the unprecedented financial crisis triggered by the Coronavirus outbreak, the government had announced an EMI moratorium for borrowers on retail loans, MSME loans, and credit card bill payments from 1st March to 31st August 2020. However, the one major criticism of the EMI moratorium offer was that the loan accounts continued to generate interest on the pending interest payments during the moratorium period.
In a significant relief to borrowers, the government has announced a waiver of the compound interest incurred by specified loans during the six-month moratorium period. Officially termed as, “Scheme for grant of ex-gratia payment of the difference between compound interest and simple interest,” this scheme will include home loans, automobile loans, consumer durable loans, personal loans, education loans, credit card dues, and MSME loans.
Now that we've outlined the scheme's essential details, we're sure you have plenty of questions. We'll walk you through the critical points of this scheme in this article. Let's get started.
Eligibility Criteria
The government has stipulated a list of criteria for a borrower to be eligible for this scheme. The conditions are:
1.Loan Category
All major retail loans like personal loans, home loans, education loans, car loans, bike loans, consumer durable loans, consumption loans are eligible. Additionally, credit card dues borne by individuals are also eligible. MSME loans taken by small businesses are also eligible for the waiver of compound interest.
2.Outstanding Loan Amount
To be eligible for this scheme, your outstanding loan amount across categories should not exceed Rs. 2 crores as of 29th February. For example, if you have a personal loan from Bank A and a home loan from Bank B, the outstanding amount put together must not be over Rs. 2 crores. Banks and other lending institutions will consider your overall debt exposure across loan products to check your eligibility. They will review your overall debts from credit bureaus before providing you the cashback/relief.
3.Status of the Loan Account
Your loan account should be classified as standard on 29th February and not declared as an NPA (Non-Performing Asset). This means, if there are any overdue payments on your loan account for more than 90 days as of 29th February of this year, then you are not eligible for the benefits of this scheme.
4.Type of Lending Institution
To be eligible for this scheme, you should have taken the loan from either a public bank, co-operative bank, regional rural banks, an NBFC, a housing finance company, or a banking company. If you have taken the loan from an MFI, it should be recognised by the RBI.
If you meet the four criteria mentioned above, then congrats. You're eligible for the benefits of the compound interest waiver scheme. It doesn't matter whether you have availed the EMI moratorium fully, partially, or not at all.
What are the benefits offered by the scheme?
As a borrower, once you’re eligible, you are entitled to the difference between compound and simple interest on your loan account for the period from 1st March to 31st August.
Allow us to explain it in simpler terms: The difference between compound and simple interest for the six-month period will be calculated and credited into each loan account of eligible borrowers.
How will the benefits be calculated?
The compound and simple interest difference will be calculated based on the prevailing interest rate on your loan. For example, let's state that you have an ongoing home loan at 8% interest. The benefits offered by this scheme will be calculated based on the 8% interest rate on the outstanding loan amount as of 29th February.
For credit cards, the rate of interest will be calculated based on the weighted average lending rate. This varies from one bank to another and ranges from 12 to 22%.
Illustration of Benefits
The central government has earmarked funds worth a massive Rs. 6,500 crores for the implementation of this scheme. However, benefits for each borrower depends on several factors like loan category, outstanding loan amount, the interest rate on loan, etc.
To give an example, let's say you have an ongoing home loan with an outstanding of Rs. 50 lakhs and you pay 8% interest on it. Then, you will receive Rs. 3,300 credited into your account as benefits under this scheme.
On the other hand, if you have an ongoing personal loan at 15% interest and an outstanding amount of Rs. 15 lakhs, then you would receive cashback around Rs. 3,500 under this scheme.
What happens if I have made EMI repayments during the moratorium period?
To ensure fairness to all eligible borrowers, the government is offering cashback to all borrowers – irrespective of whether you have availed of the moratorium partially, entirely, or not at all. Any loan repayments you have made between 1st March and 31st August are not considered for the sake of calculation. Your benefits will be calculated based on your outstanding balance as of 29th February.
Note that the rate of interest for the benefits calculation is based on prevailing interest rates on 29th February. Any interest rate changes after that will not be considered.
How will I receive the benefits?
As per the Union Government's guidelines, this scheme's benefits will be credited into individual borrowers' accounts by 5th November. However, as of writing this article, there is no explicit instruction on whether the cashback amount will be credited to borrowers' savings account or loan accounts.
The majority of lenders state the amount will be credited into borrowers' loan accounts and not the associated savings bank account. This way, borrowers can use the cashback received to reduce the outstanding loan amount further.
Wrapping Up
There's no doubt that this scheme will provide borrowers with some much-needed relief – even if the cashback is not significant. However, since it's a pan-India scheme involving millions of borrowers, implementation, and disbursement of the benefits may take some time.
Lenders have to check the multiple criteria to draw up a list of eligible borrowers. So, it may take some time before the cashback reaches your account. Suppose you qualify and do not receive any cashback before 5th November, you can approach your banker to sort out the issue.