- Government of India issued a notification stating interest would be calculated based on interest rates as of 29th February 2020
- If interest rates declined during 6 months moratorium (1st March to 31st August), the calculation might not include those changes
- Banks might credit the interest-on-interest accrued on loans during 6 months moratorium
The banks in India are most likely to credit the interest-on-interest accrued on the loans of the borrowers during the 6 month moratorium i.e. 1st March to 31st August 2020, period by the 5th of November as per the affidavit which was filed by the government with the Supreme Court of India.
On the 23rd of October, the Government announced that an ex-gratia waiver of the interest-on-interest scheme which will offer relief and financial support to the borrowers who are under financial stress owing to the ongoing COVID-19 pandemic.
Under the ex-gratia waiver scheme, the government will offer for the interest accrued on interest levied during the 6 month period of the moratorium and not the entire interest outstanding during the period.
The benefit is available to all the borrowers who have an outstanding loan, which will include credit card dues and housing, education, auto, personal and consumer loans of up to Rs 2 crore as on 29 February 2020. The benefit will be available to everyone irrespective if the borrower had opted for the moratorium or not.
Going by the guidelines which have been issued by the government, the relief offered will be equivalent to the difference between the compound interest and simple interest for the period of these six months. The calculation will be the same for all borrowers – those who did opt for the moratorium as well as for those who did not opt for the six-month moratorium and even for those who opted for less than six months of this moratorium.
Having said this, it will not be available on those loans who had become defaulted on payments before or on the 29th of February 2020. Additionally, the scheme will not be available on some loans such as loans on fixed deposits (FDs)
LiveMint and BankBazaar did some back of the envelope calculations on how much the borrowers are likely to benefit from this scheme. Let’s take a look and try to understand how much money is likely to be credited to the borrower’s account against different loans.
Case 1: Home Loan: Assume a loan of ₹50 lakh for 20 years at 8.5%. On this loan, the first 12 EMIs are paid on time, and then EMIs 13 to 19 are deferred during the moratorium.
Case 2: Car Loan: ₹10 lakh for 6 years at 10%. On this loan, the first 12 EMIs are paid on time, and then EMIs 13 to 19 are deferred during the moratorium.
Case 3: Personal Loan: 5 lakh for 4 years at 13%. On this loan, the first 12 EMIs are paid on time, and then EMIs 13 to 19 are deferred during the moratorium.
Chief Executive Officer of Bankbazaar.com, Adhil Shetty said, “Note that the notification states that the interest would be calculated basis the rate of interest as on 29 February 2020. So even if your rate of interest has declined during the 6 months of moratorium, the calculation would not include those changes. So, if your home loan rate was 8.5% as on 29 February, and fell to 7.25% over the six months, the interest calculation would still consider the original 8.5% for calculation purposes,”.
The ex-gratia any borrower would be eligible for would be a very small amount compared to the actual interest generated on the outstanding amount due to the moratorium.
Shetty added, “So, it is essential that borrowers who opted for the moratorium provision for their near-term finances as the refund will not make any significant impact. In this situation, it would be prudent, especially for borrowers with large dues, to make principal pre-payments periodically to erase the additional debt that accumulated due to the moratorium. Paying 120% of their deferred EMIs within 12 months of the last deferred EMI would help achieve this”.
The borrowers need to take into consideration the impact on the tax deduction related to home loans. Swar Pathak, a Chartered Accountant based out of Ludhiana, Punjab, said, “The deduction on interest on home loan will be reduced by the amount of relief that the government will be giving,”.