Updated: October 24, 2020 7:12:02 pm
According to the latest guidelines issued by the Ministry of Finance to banks, the difference between compound interest and simple interest will be provided for a period of six months to all borrowers with loans up to Rs 2 crore.
Lakhs of borrowers, regardless of whether they took the moratorium or not during the closing, can get some cash back from the government as soon as they have decided to submit a proposal to provide ex gratia relief. Cash back is the difference between compound interest and simple interest that are applicable to certain categories of borrowers, including housing, credit card, and MSMEs, for the period of March 1, 2020, and August 31, 2020.
A borrower with an outstanding Rs 50 lakh home loan, for example, will make a profit of about Rs 12,425 in the form of savings in compound interest accounts over a six-month period, assuming the 8 percent interest rate. At this rate, the cost of the six-month simple interest comes to roughly Rs 2 lakh, and together with the compound interest it becomes Rs 2,12,425, with the government paying the difference of Rs 12,425. All borrowers must pay simple interest to banks. The exact exemption benefit will depend on the stage of the loan and the principal amount outstanding.
What’s the latest government loan cash-back proposal?
According to the latest guidelines issued by the Ministry of Finance to banks, the difference between compound interest and simple interest for a period of six months will be provided to all borrowers with loans of up to Rs 2 crore. In simple terms, borrowers must pay only simple interest and the government will return the difference between the compound interest charged during those six months and the simple interest. The ex gratia payment under this plan will be eligible regardless of whether the borrower has made full or partial or unavailable use of the repayment moratorium. It is for those loan accounts that are standard and non-performing assets (NPA) as of February 29. For loan accounts that were closed during this period, the ex gratia payment will be made from March 1, 2020 until the closing date. of such account.
“In view of the extreme and unprecedented situation of Covid-19, the purpose of the plan is to provide the ex gratia payment of the difference between compound interest and simple interest as a relief for the period between March 1, 2020 and on August 31, 2020 to borrowers on specific loan accounts. Such payment does not constitute a contractual, legal or equitable responsibility of the central government, says the scheme.
Who is eligible for the program?
The compound interest exemption is for most loans: housing, MSMEs, education, consumer durables, credit card fees, automobiles, consumer and personal loans to professionals. Any borrower whose sum of all facilities with lenders exceeds Rs 2 crore (sanctioned limits or outstanding amounts) will not be eligible for the exemption. The exemption will be granted by all private and state banks, cooperative banks, regional rural banks, housing finance companies and non-bank financial institutions. The interest rate used to calculate the ex gratia amount will be based on the contracted rate specified for most loans. The relief came after the Supreme Court asked the government to file an interest rate relief.
What is the relief / incentive offered to borrowers?
An exemption from the compound interest lien, or interest on interest, on home, auto, MSMEs, personal and other loans of up to Rs 2 crore can be a great relief to borrowers, especially those loans that are in years Initial repayment as component interest is an important part. This would help reduce the burden on borrowers as they have to pay the contracted interest rate on the loans. Since the moratorium on loan repayments announced by the Reserve Bank of India was not an exemption, borrowers were required to pay interest and interest on interest on the accumulated amount. Clients will still have to take responsibility for simple interest accrued during the six moratorium period. A senior Finance Ministry official said an ex gratia payment is being granted even to those who did not take advantage of the moratorium, in order to create parity among borrowers and preserve the credit culture for timely repayments.
How is the calculation done?
The government has specified that for repayment, the compounding of interest must be calculated on a monthly basis. The interest rate that will be applied to calculate the difference will be the contracted rate as specified in the loan agreement. For credit card installments, the interest rate will be the weighted average loan rate (WALR) charged by the card issuer for transactions financed on the basis of EMI from its customers during the March 1 period. 2020 to August 31, 2020. The WALR calculation must be certified by the card issuer’s statutory auditor. For education, housing, consumer durables, credit card fees, auto, consumer and personal loans are in the form of a term loan or demand loan and not as an overdraft line or cash credit, the outstanding balance in the account as of February 29 to be the reference amount for the calculation of simple interest
Will the bank be able to handle it?
Bankers say it’s not an easy task and involves more paperwork for banks and home finance companies. There are hundreds of thousands of borrowers now waiting for repayment from the government. First, banks will have to process borrowers’ claims and credit the amount. They will have to file the claim for reimbursement in the designated cell of the State Bank of India (SBI), which will function as the nodal agency for the scheme, before December 15, 2020. The SBI will evaluate the claims and provide the details to the government. Credit institutions will obtain the funds through SBI.
What is the cost to the government?
According to experts, the government’s cash outflow is likely to be between Rs 5,000-7,000 crore, as all borrowers may not be eligible for the scheme. “Assuming that no more than 30-40 percent of total bank and NBFC loans will be eligible for relief, the cost to the government should not exceed Rs 5,000-7,000 crore. This is assuming that all borrowers receive relief regardless of whether they are making use of the moratorium or not, ”said Anil Gupta, vice president of ICRA Ltd. However, significantly, the government has not given any deadline to pay the repayment to the banks that they must deliver the ex-gratia to borrowers in advance before presenting it to the government.
© The Indian Express (P) Ltd
.
