You must be aware that the government has announced a loan moratorium from 1st March 2020 to 31st August 2020. Loan Moratorium was announced amid the Covid-19 pandemic. The government has announced major relief to all borrowers which is interest waiver or cashback benefit. This benefit applies to all borrowers irrespective of those who have opted for loan moratorium or not.
This benefit is given to all individual borrowers and small businesses with a loan amount of up to 2 Cr. The entire interest for six months would be waived off. If the borrower has already made a payment cashback will be issued for the interest amount. The benefit is announced by the finance ministry considering the fact extreme hardship is faced by the people due to the Corona pandemic.
Let’s look at the detail of the Interest waiver and cashback benefit announced by the government of India.
Interest Waiver & Cashback Scheme – Mar 2020 to Aug 2020
This scheme shall be called “Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts.
The said benefit applies to the loans below 2 Cr across the following loan categories. Any borrower whose aggregate of all loan amount is above 2Cr will not be eligible for this scheme.
- MSME Loans
- Education Loans
- Home Loans
- Automobile Loans
- Personal & Professional Loans
- Consumer Durable Loans
- Credit Card Dues
- Consumption Loans
The lending institute should be a public sector bank, banking company, co-operative banks, regional, rural banks, All India Financial Institution, non-banking finance institution, housing finance company, or microfinance institution.
Key Features of Interest Waiver Cashback Scheme
- The scheme will credit the difference between compound interest and simple interest for a period of six months.
- The interest rate applicable will be as per loan agreement in case of home loan, education loan, automobile, personal and consumption loans. The interest rate would be as per Feb,2020. Incase rate of interest is changed thereafter; it shall not be considered for computation.
- The credit card dues interest rate would be as per weighted average lending rate for the transactions financed on EMI basis. Penalty or penalty interest rate would not be considered.
- For cash credit, simple interest would be calculated on daily basis as on Feb, 2020. Compound interest rate would be calculated on monthly basis.
- The lender will credit the difference between compound interest and simple interest by 5th November,2020.
- Grievance redressal mechanism for the entire process would be established. The responsibility is centrally assigned to SBI.
- Lending institute needs to claim reimbursement at the central government. The claim to be lodge latest by 15th December, 2020. The claim is subject to audit.
Calculations
The benefit is applicable to all loan borrower irrespective of borrower had fully availed, partially availed or not availed moratorium facility.
Let’s try to understand this by example.
Suppose borrower has taken a home loan of 50 Lakh. The simple interest on the loan amount would be 4 Lakh per annum considering 8% interest rate.
The six monthly simple interest would be 2 Lakh and outstanding with compound interest would be Rs.212425. So, total benefit in this case would be Rs.12425.
Simple interest amount from above 2 Lakh would be paid by borrower. Rs.12425 Compound interest would be paid by the government.
Take away
It is a welcome step by the government. This step would help borrowers in the bad times especially to new borrower where interest burden is more compared to principal component. In the moratorium, the government has deferred payment of EMI for six months. This means borrowers were liable to pay interest and interest on interest. However, now only interest amount to be paid compounding interest will be paid by the customer. The liability is slightly reduced for the customers.
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