In a massive relief for individuals and MSME borrowers, The Union Government has announced an exemption from the interest compounded through loans between March and August.
What is the meaning of this?
But, if you take advantage of the EMI moratorium, you’ll only have to pay essential interest on your loan amount during the moratorium period. There is no need to cover compound or rate of claim, thus substantially reducing your debt burden.
However, you’ll be recognized for timely payment when you’ve paid your loan obligations in time during these challenging times. You will be able to receive cashback from your lender that is equal to the amount of “compound interest paid – simple interest.” The cashback will be credited to your loan account before 5th November.
Keep reading to learn more about this program to find out if you are eligible and how to benefit from it.
Overview of the Compound Interest Waiver Scheme
To help borrowers cope with the financial crisis of unprecedented proportions caused by the Coronavirus epidemic, the government declared the introduction of an EMI moratorium on borrowers who take consumer loans, MSME loans, and payment of credit card bills from 1 March through 31 August 2020. The main complaint about the EMI moratorium was that loan accounts continued to earn interest on pending interest payments throughout the moratorium.
A significant relief to borrowers, the government declared a waiver of compound interest charged by certain loans for six months that moratoriums loans. Officially referred to as “Scheme for grant of ex-gratia payment of the difference between compound interest and simple interest,” this plan will cover auto, home, and consumer durable loans. It also includes personal loans, educational loans, dues on credit cards, and MSME loans.
After having outlined the fundamentals of the scheme and responsibilities, we’re sure you’ll be flooded with questions. We’ll guide you through the critical aspects of this plan in this post. Let’s get started.
Eligibility Criteria
The government has outlined the criteria that must be met to determine if a borrower is qualified for this scheme. The requirements include:
1. Loan Category
Most retail loans, including personal loans, home loans, auto loans, education loans, bike loans, consumer durable, and consumption loans, are eligible. In addition, credit card fees that individuals pay are qualified. MSME loans made by small companies can also be exempt from compounded interest.
2. Outstanding Loan Amount
To be eligible to participate in the scheme, you must ensure that your current credit amount in all categories must be at most two crores. Two crores on 29th February. For instance, if you are a borrower of a personal loan from Bank A and a home loan from Bank B, the outstanding sum of the two loans should not exceed the amount of Rs. 2 crores. The lending institution and banks will consider the total amount of debt you have across loan products to determine your eligibility. They will review your outstanding debts with credit bureaus before offering you cashback or relief.
3. Status of the Loan Account
Your loan account must be classified as a standard account on 29th February, not ranked as one of NPA (Non-Performing Assets). That means that if there were any outstanding payments on your account for longer than 90 days before 29th February this year, you will not be eligible to receive the benefits of this scheme.
4. Type of Lending Institution
To be eligible to participate in this scheme, You must have obtained the loan from an institution that is a co-operative or public bank, a regional rural bank, or an NBFC or housing finance company or bank. If you’ve taken the loan through an MFI, then it must be recognized as such by the RBI.
Suppose you satisfy the above four requirements; 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 in full, in part, or not even in any way.
Are there any benefits that are offered in the plan?
As a borrower, once you’re eligible, you can receive the difference between simple and compound interest rates for your account from 1st March through 31st August.
Let us explain the concept more straightforwardly. The difference between simple and compound interest over six months will be calculated and then credited to each loan account of those eligible.
How are the benefits determined?
The simple and compound interest differential will be calculated using the interest rate currently in effect on your loan. Let’s say, for instance, that you are presently paying a home loan with 8 percent interest. The benefits this plan provides will be calculated using the interest rate of 8% on the outstanding loan on the 29th of February.
In the case of credit card accounts, the interest rate is calculated using the weighted average rate of lending. The rate varies from one bank to the next and can range between 12 and 22 percent.
Illustration of Benefits
The government of India has allocated a staggering sum of Rs. 6,500 crores to implement the execution of this plan. The benefits offered to every borrower are contingent on various aspects like loan categories and outstanding loan amount as well as the interest rate for the loan, etc.
To illustrate, you are currently paying off a home loan that has an outstanding of Rs. 50 lakhs. You also have to pay 8% of the interest on it. After that, you’ll be credited with Rs. 3,300 in your account as benefits in this program.
However, If you hold an outstanding personal loan paying 15% interest and an exceptional balance of Rs. 15 lakhs, you could get cashback up to 3500 rupees. 3,500 in this scheme.
What happens if I’ve paid EMI payments during the moratorium time?
To ensure fairness to all borrowers eligible and to ensure fairness, the government has offered cashback to all borrowers, regardless of whether you’ve taken advantage of the moratorium in part completely, in totality, or not at all. The loan payments you completed between 1st March and 31st August should have been counted for calculation purposes. Your benefits will be calculated based on your remaining balance as of 29th February.
The interest rate in the calculation of benefits is based upon the current interest rates on 29th February. Any rate change beyond that date is not considered.
What will I get from the benefits?
According to the Union Government’s guidelines, this scheme’s benefits will be credited to individual borrower accounts before the 5th of November. But, as at the time of writing this article, there are no specific instructions on when the cashback will be credited to the savings account of borrowers or the loan account.
Most lenders say the money is credited to borrowers’ loan accounts, not the bank’s savings account. In this way, borrowers can use the cashback to reduce the loan amount.
Wrapping Up
It will offer the borrowers much-needed relief. However, the benefit amount is not significant. But, as it’s an incredibly pan-India scheme that involves thousands of borrowers, its implementation and distribution of the benefits could take a while.
Lenders must check the various criteria before drawing up a list of qualified applicants. Therefore, it could take a while before cashback is credited to your account. If you’re eligible but have not received any cashback by 5th November, You can contact your banker to resolve the problem.
