In an earlier post, we had discussed how the Government is considering waiver of interest on interest (compound interest) for the loan moratorium period of 6 months from March 1, 2020 until August 31, 2020.
On October 23, 2020, the Central Government announced the Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (1.3.2020 to 31.8.2020). Yes, the scheme name is this long.
How Does the Scheme Work?
This is to provide relief to borrowers for financial stress due to Covid-19 related lockdown. If you had a loan outstanding as on Feb 29, 2020, you would NOT have to pay interest on interest during the moratorium period of 6 months. Or in other words, you will not have to pay compound interest on loans, but only the simple interest.
For the difference between compound interest and simple interest, refer to this post.
Who Is Eligible for the Benefit under the Scheme?
- Following type of loans are eligible for the benefit:
- MSME Loans
- Education Loans
- Housing Loans
- Consumer Durable loans
- Credit card dues
- Automobile loans
- Personal loans to professionals
- Consumption loans
- As on Feb 29, 2020, you must not have sanctioned limits and outstanding amounts of more than Rs 2 crores. Note that the limits apply not to individual facilities but to aggregate of lending facilities across financial institutions) If your loan outstanding exceeds 2 crores, you won’t get the relief.
- Your loan account must be standard as on February 29, 2020.
- You are eligible irrespective of whether you have fully availed (6 months) or partially availed (say 3 months) or not availed the moratorium.
Loans availed after Feb 29, 2020 are not eligible for relief.
How Much Relief Will I Get?
The Government has specified a simple method.
- Consider Loan outstanding on Feb 29, 2020.
- Consider Loan Interest Rate (will vary for different types of loans)
- Calculate Compound interest for 6 months using such loan amount and interest.
- Calculate Simple interest for 6 months using such loan amount and interest.
- Relief = Compound Interest for 6 months – Simple interest for 6 months.
- This relief will be credited to your loan account by November 5, 2020.
- The Government will reimburse the banks for such relief provided to you.
Points to Note
- You do not have to apply. The bank will auto-credit the relief in your account.
- Loan outstanding as on Feb 29, 2020 shall be considered for calculation.
- Subsequent payment/prepayments/withdrawals (after Feb 29, 2020) from the loan account will not affect the relief amount. This ensures that everybody, irrespective of whether they availed the moratorium or not, gets the similar benefit.
- While there is some confusion around this, as I understand, the interest rate as on February 29, 2020 shall be considered for calculation of the relief. Subsequent changes in interest rates/penal interest for late payment shall not be considered for calculation of relief.
- For education loans, housing loans, Automobile loans, personal loans and consumption loans, the rate considered shall be as per the loan agreement.
- For consumer durable loans, if no interest is being charged on the loan (I am not sure what the Government is referring to. Even No-cost EMIs have interest rates), then lender’s base rate/MCLR shall be considered for such calculation)
- For Credit card dues, the interest rate to be used for calculation shall be the Weighted Average Lending Rates (WALR) charged by the credit card issuer for transactions financed on EMI basis from its consumers during the period from March 1, 2020 until August 31, 2020. Now, this interest rate can be much lower than the rate your bank charges on credit card overdues.
Will the Relief Be Meaningful?
Let’s look at a few examples.
| Loan Amount as on Feb 29, 2020 | 50,00,000 | 50,00,000 | 10,00,000 | 5,00,000 | 3,00,000 |
| Interest Rate as on Feb 29, 2020 | 8.0% | 8.0% | 10.0% | 15.0% | 36.0% |
| Outstanding Tenure as on Feb 29, 2020 (in months) (This does not affect relief amount) | 240 | 180 | 60 | 240 | 240 |
| Moratorium availed (in months) | 6 | 3 | 6 | 6 | 6 |
| Compound interest during the moratorium period | 2,03,363 | 1,00,668 | 51,053 | 38,692 | 58,216 |
| Simple interest during the moratorium period | 2,00,000 | 1,00,000 | 50,000 | 37,500 | 54,000 |
| Ex-gratia payment to be credited to Loan Account (this amount will be credited to investor loan account) | 3,363 | 668 | 1,053 | 1,192 | 4,216 |
As you can see, the relief amount is not significant, compared to the quantum of loan. It is a relief, nonetheless. Such amounts will be credited to your loan account on or before November 5, 2020.
I Did Not Avail Moratorium. Will I Also Get the Benefit?
You will still get relief. As mentioned earlier, you are eligible for relief irrespective of whether you availed the moratorium or not.
I Closed the Loan Account during the Moratorium Period. Will I Get Any Benefit?
Yes, you will. However, you will not get relief for the full 6 months. You will get relief for the period your loan was alive. For instance, if you closed the loan on June 30, 2020, you would get the relief as calculated for 4 months. i.e., your account (I assume savings bank account) will be credited with the difference between simple and compound interest for 4 months (and 6 months).
Will This Ex-Gratia Payment Be Taxed?
I am not sure of this, but I think such payment will be taxed at your marginal tax rate. Please consult your Chartered Accountant for better clarity.
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