Here an FAQ covering eligibility, interest rate computation and extent of benefit available to borrowers
To offer relief to small borrowers, the Centre has rolled out the much-awaited waiver of compound interest scheme. The relief will be paid to the borrower in the form of grant of ex-gratia payment of difference between compound interest and simple interest for six months (from March 1 to August 30). So, how does the scheme work? Do you, as a borrower, stand to gain substantially from the scheme? Here is an FAQ.
Are you eligible?
For starters, to be eligible under the scheme you need to satisfy certain conditions. One, MSME, education, housing, consumer durable loans, auto loans, credit card dues, personal loans to professionals and consumption loans are eligible under the scheme. Essentially almost all loan categories can benefit from the scheme.
Two, as on February 29, the aggregate outstanding amount across all your loans accounts should not exceed ₹2 crore across all lending institutions. In other words, if you have multiple loans, say home loan and a personal loan, then the outstanding amount for both loans put together (across several lenders) should not exceed ₹2 crore. Hence, banks will check the overall exposure of a borrower across all loans and lending institutions from credit bureaus before offering the relief.
Three, your account should be standard and not an NPA as on February 29. This means that if principal or interest payment on your loans remained overdue for a period of 90 days (as on February 29), then you cannot avail the scheme.
Four, the lending institution should either be a banking company, public sector bank, co-operative bank or regional rural bank, an all India financial institution, a non-banking financial company or a housing finance company. In the case of an MFI, it should be a member of a self-regulatory organisation recognised by the RBI.
Lastly, the good news is that all borrowers who meet the above conditions will be eligible for the benefit irrespective of whether they opted for the moratorium (temporary postponement of payments for the period from March 1 to August 31) or not.
What is the benefit?
The relief that borrowers will get under the scheme is the difference between the compound interest and simple interest for the period from March 1 to August 31. Put simply, for each category of loans, the difference between the compound and simple interest for the six-month period will be credited to the borrower’s account. If your loan account has been closed mid-way (say May 31), then the relief will be for the period between March 1 and the date of closure of the account (May 31 in this case).
But how will this be calculated?
For almost all categories of loans — education, housing, auto, personal loans and consumption loans and MSME term loans — the rate of interest to be applied for calculating the difference between compound and simple interest will be the contracted rate prevailing as on February 29. For instance, if you have a home loan and you were paying 8 per cent interest on it as of February 29, then the benefit will be computed based on 8 per cent rate on the amount outstanding as of February 29.
In the case of credit cards, the rate of interest will be the weighted average lending rate charged by the card issuer for transactions financed on EMI basis from its customers during the period from March 1 to August 31. In this particular case, check with your bank to understand the rate since each bank charges a range of interest (12-22 per cent).
So, is the benefit substantial? How much amount will be credited back for a home loan of say ₹50 lakh?
While the entire outgo for the Centre for the scheme is a tidy ₹6,000-odd crore, for you as a borrower the benefit may not be too substantial. This is because, the benefit that accrues to you is the difference between compound and simple interest — essentially interest on interest — which may not be much for secured loans such as home loans.
For instance, if you have an outstanding loan amount of ₹50 lakh and you were paying 8 per cent interest, then about ₹3,300 will be credited back to you.
In case of personal or credit cards, while the interest charged is higher, the amount outstanding would be much lower. Even if we assume that you have ₹15 lakh outstanding on personal/credit card dues, at 15 per cent the benefit will be about ₹3,500.
What happens if the rate of interest has changed after February 29? And what if repayments have been made on the loan during March 1 and August 31?
For calculating the benefit, the rate of interest prevailing on February 29 will be considered. Any change after that will not be taken into account. Also, repayments made during March 1 and August 31 will be ignored and hence the outstanding amount as of February 29 will be reckoned for the computation. This is to ensure that all borrowers get the same benefit irrespective of whether they availed the moratorium (in part or full) or not.
By when will the amount be credited? Will it be credited to my savings account?
According to the Centre’s guidelines, the amount should be credited by lending institutions to the borrower’s accounts by November 5. If you have any issues relating to the scheme, you can approach your respective lending institution that is mandated to set up a grievance redress mechanism.
While the guidelines do not explicitly state it, some bankers say the amount will be credited to the loan account (and not savings account) of borrowers. This benefit will in turn be used to reduce the outstanding amount on the loan.
Will the transfer be smooth or could banks face issues implementing the scheme?
Since bank have to run multiple checks — check the threshold limit of ₹2 crore across all loans and lenders for a particular borrower, assess the status of the account (standard or NPA), interest rate charged (could vary across borrowers) etc — there could be slips and eligible borrowers may miss out on the benefit. Hence if you meet all the conditions, approach the bank if it fails to credit the benefit before November 5. Also, ensure that you understand the payment terms (particularly if you availed the moratorium) on the existing loan.