In a massive relief for individuals and MSME borrowers, The Union Government has announced an exemption from the compound interest charged by loans between March and August.
What is this referring to?
If you opt for an EMI moratorium, you’ll only have to pay simple interest on the loan for the duration of the moratorium. There is no need to produce a compound, which is the rate of interest, thus drastically reducing your total debt burden.
However, you’ll be recognized for timely payment when you’ve paid your loan obligations during these challenging times. You will get a cashback from your lender equal to the difference between “compound interest paid – simple interest.” The cashback will be added to your account on loan before November 5.
Read on to learn more about this program to find out if you qualify and to learn more about how you can take advantage of it.
Overview of the Compound Interest Waiver Scheme
To help borrowers cope with the financial crisis caused by the Coronavirus epidemic, The government declared an EMI moratorium for borrowers of Retail loans, MSME loans, and credit card bill payments beginning March 1 through August 31, 2020. The main critique of the EMI moratorium was that loans continued to earn interest on pending interest payments even during the moratorium.
Significant relief for borrowers, the government announced a reduction in the compound interest charged through loans arranged for six months that moratoriums loans. The scheme is officially referred to as the “Scheme for grant of ex-gratia payment of the difference between compound interest and simple interest,” This plan includes auto loans, home loans, and consumer durable loans. It also includes personal loans, education loans, credit card fees, and MSME loans.
After we’ve laid out the fundamentals of the scheme and responsibilities, we’re sure you’ll be flooded with questions. We’ll help you understand the critical aspects of the project in this post. Let’s get started.
Eligibility Criteria
The government has provided the criteria that must be met for borrowing applicants to be able to participate in this program. The requirements include:
1. Loan Category
Most retail loans, including home loans, personal mortgages, loans for education, bicycle loans, car loans, Consumer durable loans, and consumption loans, are all eligible. In addition, credit card fees for individuals are qualified. MSME loans that small-sized businesses take are suitable for a waiver of interest compounding.
2. Outstanding Loan Amount
To be eligible to participate in this program, the total credit amount in all categories should not exceed the amount of Rs. 2 crores on February 29. If, for instance, you are a borrower of a personal loan from Bank A and a home loan from Bank B, the outstanding total cannot exceed the amount of Rs. 2 crores. The lending institution and banks will look at your debt-to-debt ratio across loan products to determine your eligibility. They will examine your total credit reports from credit bureaus before giving you cashback or relief.
3. Status of the Loan Account
Your loan account must be classified as a standard account on February 29 and should not be declared one of NPA (Non-Performing Assets). That means that if overdue payments are due in your account that are longer than 90 days before February 29 this year, you’re not eligible for the benefits this scheme offers.
4. Type of Lending Institution
To be eligible to participate in this scheme, Yu must have obtained a loan from an institution that is a cooperative or public local rural bank, a regional bank, an NBFC, or a housing finance company or bank. If you took the loan through an MFI, it must be recognized by the RBI.
Suppose you’re able to meet the criteria above, congratulations. You’re qualified for the advantages of the compound interest exemption program. It doesn’t matter if you have taken advantage of the EMI moratorium completely, partially, or not even in any way.
Are there any benefits provided through the program?
If you’re a borrower, when you’re eligible, you’ll be eligible to receive the difference between simple and compound interest rates for your account from March 1 through August 31.
Let us discuss the matter in simple terms. The distinction between simple and compound interest over six months will be calculated and then credited to each loan account of the eligible borrowers.
How are the benefits determined?
The simple and compound interest rate is calculated based on the current interest rate for your loan. Let’s say, for instance, that you’re currently paying off a home loan with 8.8% interest. The benefits of this program will be calculated on the interest rate of 8% on the loan balance on February 29.
In the case of credit card holders, The interest rate is determined based on the weighted average of the lending rate. It varies from one institution to the next and can range between 12 and 22 percent.
Illustration of Benefits
The government of India has allocated funds of a staggering amount of Rs. 6,500 crores to implement the implementation of this plan. However, the benefits to every borrower are contingent on various variables like loan type, amount of loan outstanding, the rate of interest on the loan, etc.
To illustrate, suppose you are currently paying off a home loan with an outstanding amount of Rs. 50 lakhs. You pay 8% interest on it. After that, you’ll be credited with Rs. 3,300 added to your account as a benefit from this plan.
However, if you hold an outstanding personal loan with 15% interest and an exceptional amount of fifteen lakhs, you could get cashback up to 3500 rupees. 3,500 in this scheme.
What happens if I’ve completed EMI payments during the moratorium time?
To ensure fairness for all borrowers eligible and to ensure fairness, the government has offered cashback to all borrowers, regardless of whether you’ve used the moratorium only partially, entirely, ultimately, or at all. The loan payments you completed between March 1 and August 31 are not counted for calculation purposes. Your benefits will be calculated based on your outstanding balance on February 29.
Be aware that the interest rate in the calculation of benefits is based on the interest rates on February 29. If interest rates change beyond that date, they are not considered.
What will I get from the benefits?
By the guidelines of the Union Government, the scheme’s benefits are credited to individual borrower accounts on November 5. But, as at the time of writing this article, there’s no clear guidance on how the cashback amount will be transferred to the savings account of borrowers or loan accounts.
Most lenders stipulate that the money will be credited to the borrower’s loan accounts, not the bank’s savings account. So, the borrowers can use the cashback to lower the loan amount.
Wrapping Up
Undoubtedly, this program can provide borrowers with needed relief, regardless of whether the amount itself is not that significant. But, as it’s an incredibly pan-India scheme involving many borrowers, implementing and distributing benefits could take time.
Lenders must check the numerous criteria to draw up a list of qualified applicants. Therefore, it could take a while before cashback is credited to your account. If you’re eligible but do not get any cashback before November 5, You can contact your banker to resolve the problem.
