The Government of India has directed all banks and other financial institutions to refund the difference between the compound interest and the simple interest paid by borrowers between March 1 and August 31, 2020.
The RBI on March 27 had issued the circular which allowed lending institutions to grant a moratorium on payment of installments of term loans falling due between March 1, 2020, and May 31, 2020, due to the pandemic. Later, the period of the moratorium was extended till August 31, 2020.
1. Where shall I apply for the scheme?
The finance ministry has released criteria for banks and other financial institutions to draw up a list of borrowers who would be eligible for the scheme. Eligible borrowers would not be required to apply for the ‘interest on interest’ waiver scheme as the government has asked the financial institutions to credit the ex-gratia amount into the respective loan accounts of eligible borrowers.
2. I did not opt for a loan moratorium. Will I be eligible for the scheme?
This scheme will benefit all borrowers including those who did not opt for the moratorium. Those borrowers that had continued repaying their loans as per schedule will also stand to benefit. For such borrowers, it will be assumed that they had availed of the moratorium, and the compound interest that would have accrued will be adjusted against their outstanding loans.
3. What loans are covered by the scheme?
The scheme will be extended for loans below ₹2 crores availed across eight categories:
1) Micro, small and medium enterprises (MSMEs) loans,
2) Education loans
3) Housing loans
4) Consumer durables loans
5) Credit card dues
6) Auto loans
7) Personal and professional loans
8) Consumption loans.
4. When can I expect the proceeds from the scheme?
The financial institutions must credit the difference between compound interest and simple interest to the eligible borrowers by 5 November. After refunding eligible borrowers, financial institutions can lodge their refund claims with the government till December 15. The interest waiver scheme for the loan moratorium is expected to cost the government approximately Rs 6,500 crore.
5. How much do you stand to save?
For the purposes of this illustration, let’s assume that an individual has a home loan of Rs. 10 lakhs at a fixed rate of 8% to repaid in 10 years and the individual paid his first EMI of Rs. 12,133 on March 12, 2020.
Since the individual has opted for the moratorium, the individual will not be making the EMI payment of Rs 12,133, which includes a principal component of Rs. 5,466 and an interest component of Rs 6,667. And due to moratorium, the interest component gets added to the outstanding principal, which as of April 12 stood at Rs. 10,06,667. The interest payable in that month is then calculated using this higher principle.
And in a similar manner, the interest payable every month continues to be added to the outstanding principal, which at the end of the moratorium adds up to Rs. 10,33,781.
This includes accumulated simple interest of Rs 40,002 and interest-on-interest of Rs 671. According to the government’s scheme, this interest-on-interest will be waived.
Amount due post moratorium without government scheme: Rs. 10,40,673
Amount due after applying for government scheme: Rs. 10,40,002
Interest on Interest covered by government scheme: Rs. 671
Credit Card Loan/Dues
Credit card dues are also included in the government’s scheme. However, the rate of interest used to calculate the interest-on-interest in the case of such dues will not be the rolling over interest rate that is normally levied.
The Finance Ministry clarified that for credit card dues, “The rate of interest will be the Weighted Average Lending Rate charged by the card issuer for transactions financed on EMI basis from its customers during the period of March 1 to Aug. 31.” The differential in the simple and compound interest on credit card dues will be calculated assuming that the borrower’s dues have been converted to an EMI at an annual interest rate of 18-20%.
For the purpose of this illustration, let’s assume, then, that an individual had an amount outstanding of Rs 1 lakh on their credit card as of Feb. 29. At an annual rate of 20%, the simple interest on this outstanding would amount to Rs 1,667.
If the interest were to be compounded as shown in illustration 1, it would lead to an additional charge of Rs 424 over the course of the next six months.
Amount due post moratorium without government scheme: Rs. 1,10,426
Amount due after applying for government scheme: Rs. 1,10,002
Interest on Interest covered by government scheme: Rs. 424