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Seeking relief on loan/credit card payments amid the financial problems caused by the COVID-19 pandemic? Here’s some good news for you! The government has rolled out an interest relief package – Ex-gratia Payment Scheme – for borrowers having sanctioned and outstanding loan limits not exceeding INR 2 Crores. As per the government guidelines, lenders will credit the difference between compound interest and simple interest for six months (March 1 – August 31, 2020) into the credit account of borrowers. You can also call it Interest Cashback Scheme on Loan Moratorium. Doesn’t matter whether you had availed a full, partial or no moratorium on your loan/credit card during the said period, you will get the credit. Lending institutions can later claim reimbursement from the government for the credit they do. Let’s read on to know more about the scheme.
Credit Accounts That Will Qualify for Interest Cashback Scheme on Loan Moratorium
Borrowers having sanctioned and outstanding credit limits (Sum of all credit facilities with lending institutions) not exceeding INR 2 Crore as on Feb 29, 2020, will be eligible for the Ex-gratia payment scheme. The loan account should be standard and not a non-performing asset (NPA) as on the said date. As per the government release, borrowers servicing the following loans can benefit from this scheme –
- Personal Loans to Professionals
- Housing Loans
- Credit Card Dues
- Automobile Loans
- Education Loans
- MSME Loans
- Consumption Loans
How Will the Interest Cashback Scheme on Loan Moratorium Apply?
Lenders will calculate the simple and compound interest on outstanding loan balance as on Feb 29, 2020. You could ask – which rate of interest will your lender apply to calculate the difference between simple and compound interest? Well, it will use the contracted rate as specified in the loan agreement/documentation as on Feb 29, 2020. This rule will apply to Housing Loans, Personal Loans to Professionals, Consumption Loans, Automobile Loans, Education Loans, Consumer Durable Loans and MSME Loans (Term Loans).
In the case of Consumer Durable Loans where no interest is being charged on Equated Monthly Installments (EMIs) for a specific period, the lender could use its base rate or Marginal Cost of Lending Rate to calculate the difference between simple and compound interest.
The interest rate on MSME Loans when disbursed through an overdraft or cash credit will be the same as in the case of term loans. But the difference lies in the way it is to be used. Here, lenders will calculate the simple interest based on the daily outstanding balance.
What About Credit Card Shoppers – How Much Benefit Will They Get from this Initiative?
If you are paying your credit card bill in full on or before the due date, this news is not for you! The reason being there won’t be any interest on your credit card transactions following this good payment behaviour. But some may not have been paying the bill in full. For them, this Ex-gratia Payment Scheme can be a saviour! Lenders will use the Weighted Average Lending Rate (WALR) for credit card EMI transactions of customers during the period – March 1 – August 31, 2020.
How Will the Compound Interest Apply?
As far as compound interest goes, it is generally applied on a monthly, quarterly, half-yearly or annual basis. Here, in this Interest Cashback Scheme on Loan Moratorium, lenders will calculate compound interest on monthly rests at the rate as on 29th Feb 2020 for 6 months.
Let’s Check Out the Benefits in Numbers
To understand the benefits of Ex-gratia Payment Scheme, we have taken examples of home loans, personal loans and credit cards. In the case of credit cards, the cashback scheme will apply to the interest charged on EMI transactions and not the revolving balance. EMI transactions can have interest rates ranging from 12-18% per annum. So, our calculations for credit cards will be made at the rate within the said range.
Example – Ravi, Shyam and Meera had an outstanding home loan, personal loan and credit card balance of INR 50 lakh, INR 6 lakh and INR 1 lakh, respectively, as on Feb 29, 2020. The interest rate of home loan, personal loan and credit card is 7.90%, 13% and 15%, respectively. Check out the table below to know the interest cashback benefits they are going to have.
|Products||Compound Interest||Simple Interest||Interest Cashback|
|Home Loan||INR 2,00,779.19||INR 1,97,500||INR 3,279.19|
|Personal Loan||INR 40,071.63||INR 39,000||INR 1,071.63|
|Credit Card||INR 7,738.32||INR 7,500||INR 238.32|
When Can You Get the Credit from Lenders?
Lending institutions will need to credit the cashback into the accounts of borrowers latest by November 5, 2020.
Which Banks and Financial Institutions Will Give You Interest Cashback Benefits?
- Public and Private Sector Banks
- Co-operative Banks
- Regional Rural Banks
- All India Financial Institution
- Non-banking Finance Companies (NBFCs) having a membership to an RBI-recognized self-regulatory organization
- Housing Finance Companies (HFCs) registered with the RBI or National Housing Bank