Am I eligible for Compound Interest Waiver on Loan during the moratorium period?
Govt of India has announced that now that interest on interest (compound interest) waiver on loan during the moratorium period. The central government had earlier filed an affidavit with Supreme Court indicating that it would waive interest on interest on loans up to Rs 2 Crore for eligible borrowers. You might be getting doubt “Am I eligible for Compound Interest Waiver on Loan during Moratorium period”. In this article we would provide who is eligible for interest on interest (compound interest) loan waiver during the moratorium period. We would also indicate approximate compound interest which would be waived off with a few examples.
What is an EMI waiver during the moratorium period all about?
Skip this if you are already aware.
Owning to covid-19, many loan borrowers were not able to make EMI payments for the loans availed by them. Govt of India has taken the decision to provide a moratorium of EMIs on loan for 3 months from Mar-2020 to May-2020 which was later extended for another 3 months from Jun-20 to Aug-2020. During this period, loan borrowers who availed loans can request for a moratorium and need not pay EMIs. However, there would be interest on the interest that was imposed by bank and financial institutions. Means, this moratorium was only to delay the EMIs and compound interest was an extra burden to loan borrowers.
Now Govt of India has provided clarity for waiver of compound interest on loans during the moratorium period.
Who is eligible for interest on interest (compound interest) waiver on loans during the moratorium period?
Here is the eligibility list to get a waiver on interest on interest on loans borrowed.
1) Following loans are eligible
- Home loans
- Consumer durable loans
- Educational loans
- Auto loans
- Personal loans
- Professional and consumption related loans
- MSME Loans
- Credit card dues / EMIs converted through credit card dues
2) The maximum aggregate loan amount from all banks/financial institutions should not exceed to Rs 2 Crores.
3) Loans should have been availed and loan account should be active by the end of Feb-2020. Any defaulter loan accounts are not eligible for this scheme.
4) Loan lending institution can be private banks, public sector banks, co-operative banks or regional, rural banks, all India Financial Institutions, NBFCs or Housing Finance Company.
5) It is irrespective whether you have availed EMI waiver during moratorium period or not. Govt of India would make it to borrower’s loan account irrespective of whether the loan borrower fully availed, partially availed or not availed the EMI waiver during the moratorium period. Means, even if you have not opted for the moratorium, you are also eligible under the scheme.
6) As per this scheme, the difference between the interest on interest (compound interest) and simple interest will be credited to the loan borrower’s bank account for the period between March 1, 2020 and August 31, 2020 (Six months).
7) The computation of interest amount would be based on the loan outstanding till the end of Feb-2020.
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How will this scheme work exactly?
Here is how it would work
1) Based on the loan outstanding at the end of Feb-2020, the interest amount would be computed from 1 March 2020 to 31-Aug-2020 (6 month period). It is irrespective whether you opted for loan moratorium fully, partially or not availed. The compound interest for this period would be computed. Compound interest vs simple interest would be the difference which would be borne by Govt of India. E.g. if you have personal loan outstanding of Rs 10 Lakhs as of end of Feb-2020, interest for 6 months during Mar-20 to Aug-20 is say Rs 75,000 (15% p.a.) and compounding interest (interest on interest) is say approx. Rs 15,000 and total interest outstanding by the end of Aug-20 is Rs 90,000. Govt of India would bear this interest on interest of Rs 15,000 and loan borrower need to pay Rs 75,000 interest only which is simple interest.
2) Govt of India would bear this difference between a compound interest vs simple interest and pay to a lending institution (bank or financial institution) and in turn the lending institution would credit the amount to a borrower’s bank account (not adjusted against the loan) by November 5, 2020. Hence, if you check your bank account (linked to loan account) the amount would would be credited by November 5, 2020.
Whom this scheme would benefit?
This would benefit all the loan borrowers who are active by the end of February, 2020. More effectively if the loan borrowed is older, the interest would be less and scheme benefit would be less. If the loan amount is new (availed prior to Feb-2020) or interest amount is high, the interest on interest waiver would be high. Let me explain with two examples, i.e. one with personal loan taken @ 15% interest and other is home loan taken @ 8% interest. These are approximate computations and it may vary by lending institution as per their computation methodology.
Should you do anything to avail this scheme?
No. Whether you have opted for loan moratorium fully, partially or not opted at all, you don’t need to do anything. Just check your bank account (that is linked to loan account) in the second week of November, 2020 to see that such interest difference is credited to your savings bank account. If not, please approach your lending institution seeking clarity.
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