Introduction 

With the continued impact of the Covid-19 pandemic on the economy, the Indian government announced multiple timely measures to offer relief to millions of individuals and small businesses. The compound interest waiver is meant for those who have outstanding loans of maximum Rs. 2 crores. Lenders have been given time until Nov. 5, 2020, for compensating borrowers with regards to compound interest accrued over a span of six-months beginning March. 

According to the scheme announced by the government, loan borrowers, including MSME loans, and many retail loans will not be required to pay compound interest or the interest-on-interest on the loans for the moratorium period. Many banks had started accruing compound interest over the six-month period of moratorium.

Borrowers who had continued to repay their loans as per pre-decided schedule will also be able to benefit from this scheme. In such cases, the assumption will be that they had availed the moratorium benefit, and the accrued compound interest will be adjusted against outstanding loans of such borrowers.

How does it work?

Borrowers who are looking to benefit from this scheme must note that the amount they will save from compound interest waiver could be far smaller. This is primarily because only the proportionate interest which had been charged on top of the interest on the original loan during the moratorium period will be waived off. 

In simple terms, the loan repayment continues as per pre-agreed terms and borrowers will still have to pay back the principal amount along with the simple interest that would have been paid if the borrower did not opt for the loan moratorium. Only the proportionate compounding interest is waived off.

Additional Reading:  Guidelines For The Implementation Of Compound Interest Waiver On Moratorium Loans

Eligibility Criteria

Here are the eligibility criteria that borrowers must make note of:

  1. The scheme is applicable only for loans that were availed by Micro, Small and Medium Enterprises (MSMEs) along with loans offered to retail customers for purposes such as education, housing, automobiles, consumer durables. A borrower must have total outstanding loans of maximum Rs. 2 crores considering all such loans.
  • Credit card dues are also included in the scheme’s purview.
  1. The loan interest waiver can be requested, irrespective of whether a borrower has availed the moratorium in part, full, or has not availed at all.
  2. The waiver is permitted only for loan accounts that had previously not been reported as Non-Performing Assets (NPAs) as of 29th February 2020.
  • A loan is considered as a non-performing asset or NPA, 90 days after repayments have been overdue. 

Effect of Waiver

The net amount that can be saved from loan interest waiver may be small for many applicants. This is mainly because only the proportionate interest that is charged on the interest of the outstanding loan during the moratorium period will be waived off.

In other words, the loan repayment must be continued along with the payment of simple interest that would be the case in case the moratorium option is not used by the borrower.

  • It is important to note that only the compounding interest is waived off.

Impact on Credit Card Dues

Here's how this waiver benefits those who have credit card dues:

On credit card dues, the interest rate is calculated using the Weighted Average Lending Rate (WALR) by the card issuer. This is specifically for transactions that have used EMI mode during the period starting March 1, 2020, to August 31, 2020. The WALR calculation on credit card dues must be certified by a statutory auditor appointed by the card issuer.

Credit card issuers generally rely on a variety of rates for financing through EMI. Since there is no standard rate available, WALR is mainly used as the benchmark rate. In case accounts are closed during the 6-month moratorium, the crediting period is considered from March 1 up to the date of account closure.

The lending institutions have been advised by the government to claim the reimbursement from the latter after crediting the amount to the beneficiary. 

How can borrowers benefit?

The total relief offered to borrowers under this scheme is the difference of compound interest and simple interest for the period starting March 1 to August 31. For every loan category, the compound and simple interest difference for the six-month period is to be directly credited to the borrower’s account. If a borrower’s loan account was closed mid-way (example, May 31), then the relief offered will be considered from March 1 and the date of account closure (example, May 31).

Borrowers may not benefit substantially from this scheme primarily because the benefit is limited to the difference between compound and simple interest. This is essentially interest on interest for secured loans like home loans. For example, if you have a loan of Rs. 50 lakhs and you were charged 8 % interest, then you can expect a credit of Rs. 3,300 into your account.

For personal loans or credit cards, the interest charged is on a higher side and hence the outstanding amount may be much lower. If an individual has an outstanding loan amount of Rs. 15 lakhs on personal/credit card, at an interest of 15 %, the expected benefit is somewhere around Rs. 3,500.

Timeline for Availing Benefit

According to the guidelines released by the government, the lending agencies must credit the benefit amount to borrower’s accounts by November 5. For any issues in availing the benefits of this scheme, borrowers can approach their respective lending institutions since they have been mandated to have a grievance redress mechanism in this regard.

Although the guidelines do not clearly state it, some lending institutes suggest that the amount is to be credited to the loan account (as against savings account) of borrowers. This benefit can be used for reducing the outstanding loan amount.

Conclusion

The government has offered a big relief to the loan borrowers in India, right before the Diwali season. Apart from the benefit of a moratorium, borrowers can also avail the compound interest waiver to ease any financial stress during these difficult times.