To provide relief to small borrowers, the Center implemented the much anticipated Compound Interest Waiver Plan. Relief will be paid to the borrower in the form of an ex gratia payment of the difference between compound interest and simple interest for six months (March 1 to August 30). So how does the scheme work? As a borrower, do you stand to gain significantly from the scheme? Here is an FAQ.
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To get started, to be eligible for the plan, you must meet certain conditions. One, MSMEs, education, housing, durable consumer loans, auto loans, credit card contributions, personal business loans, and consumer loans are eligible for the scheme. Virtually almost all categories of loans can benefit from it.
Second, like February 29th, the total amount outstanding on all your loan accounts should not exceed ₹ 2 crore across all lending institutions. In other words, if you have more than one loan, for example a home loan and a personal loan, the outstanding amount of the two loans combined (on multiple lenders) must not exceed ₹ 2 crore. Therefore, banks will check a borrower’s overall exposure to all loans and lending institutions from the credit bureaus before offering relief.
Third, your account should be standard and not a postcode like February 29th. This means that if your loan principal or interest payment is overdue for a period of 90 days (such as February 29), you cannot benefit from the plan.
Fourth, the lending institution should be a banking company, a public sector bank, a cooperative bank or a regional rural bank, an Indian financial institution, a non-bank finance company or a housing finance company. In the case of an MFI, it must be a member of a self-regulatory body recognized by the RBI.
Finally, the good news is that all borrowers who meet the above conditions will be able to claim the benefit whether or not they have opted for the moratorium (temporary postponement of payments for the period from March 1 to August 31).
The relief that borrowers will receive under the scheme is the difference between compound interest and simple interest for the period from March 1 to August 31. In other words, for each category of loans, the difference between compound and simple interest for the six months will be credited to the borrower’s account. If your loan account was closed mid-term (say May 31st) then relief will be for the period between March 1 and the account close date (May 31st in this case).
But how will this be calculated?
For almost all loan categories – education, housing, auto, personal and consumer loans and MSME term loans – the interest rate to be applied to calculate the difference between compound and simple interest will be the prevailing contractual rate. to February 29. For example, if you have a home loan and you pay 8% interest on it on February 29, the benefit will be calculated based on a rate of 8% on the amount owed on February 29.
In the case of credit cards, the interest rate will be the weighted average debit rate charged by the card issuer for transactions financed on the IME basis of 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 percent).
So, does the profit matter? How much will be credited back for a home loan of, say, 50 lakh?
Although the Centre’s total expenditure for the program is approximately 6,000 crore, for you as a borrower the benefit may not be too substantial. This is because the benefit 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 example, if you have an unpaid loan amount of 50 lakh and you pay 8% interest, then around 3,300 yen will be credited to you.
In the case of personal or credit cards, while the interest charged is higher, the outstanding amount would be much lower. Even if we assume you have 15 lakh unpaid on personal / credit card dues, at 15% the benefit will be around 3,500.
What happens if the interest rate changes after February 29? What if repayments were made on the loan between March 1 and August 31?
For the calculation of the benefit, the interest rate in effect on February 29 will be taken into account. Any subsequent modification will not be taken into account. In addition, refunds made during March 1 and August 31 will be ignored and the amount overdue on February 29 will therefore be taken into account for the calculation. This is to ensure that all borrowers receive the same benefit, whether or not they have taken advantage of the moratorium (in part or in full).
When will the amount be credited? Will it be credited to my savings account?
According to the guidelines of the Center, the amount must be credited by credit institutions to the borrower’s accounts before November 5. If you have any problems with the program, you can contact your respective lending institution which is mandated to set up a complaints mechanism.
Although the guidelines do not explicitly mention it, some bankers claim that the amount will be credited to the loan account (not the savings account) of borrowers. This advantage will in turn serve to reduce the outstanding amount of the loan.
Will the transfer be smooth or could the banks run into problems in implementing the program?
Since the bank has to do several checks – check the ₹ 2 crore threshold limit on all loans and lenders for a particular borrower, assess the account status (standard or NPA), the interest rate charged (can vary from one borrower to another), etc. could be slips and eligible borrowers may not take advantage of the benefit. Therefore, if you meet all the conditions, contact the bank if it does not credit the service before November 5. Also make sure you understand the payment terms (especially if you have made use of the moratorium) on the existing loan.