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Compound interest waiver: How much your bank may credit to your account

The calculation will be the same for all borrowers—those who didn’t opt for moratorium, those who opted for the six-month moratorium and those who opted for less than six months of moratorium. (Mint)Premium
The calculation will be the same for all borrowers—those who didn’t opt for moratorium, those who opted for the six-month moratorium and those who opted for less than six months of moratorium. (Mint)

  • The government 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.

MUMBAI: Banks are likely to credit the interest on interest accrued on the loans of the borrowers during the 6-month moratorium (1 March -31 August) period by 5 November as per the affidavit filed by the government with the Supreme Court.

The government had announced on 23 October an ex-gratia waiver of interest -on-interest scheme to provide some relief and financial support to borrowers who may be facing financial difficulties due to covid-19.

Under this scheme, the government will provide for the interest accrued on interest levied during the period of the moratorium and not the entire interest outstanding during the period. The benefit is available to all borrowers with any outstanding loan, including credit card dues and housing, education, auto, personal and consumer loans of up to 2 crore as on 29 February 2020. The benefit will be available to those who have opted for moratorium or not.

According to the guidelines issued by the government, the relief will be equivalent to the difference between the compound interest and simple interest for the period of six months. The calculation will be the same for all borrowers—those who didn’t opt for moratorium, those who opted for the six-month moratorium and those who opted for less than six months of moratorium.

It is not available on those loans which has become defaulted on payments on or before 29 February. It is also not available on loans such as loan on fixed deposits.

So, with the help of Bankbazaar.com we did some back of the envelope calculations on how much the borrowers are likely to benefit from the scheme. Let's 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.

Interest waiver table
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Interest waiver table

“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," said Adhil Shetty, CEO, Bankbazaar.com.

The ex-gratia a 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. “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," said Shetty.

Borrowers should also be mindful of the impact on the tax deduction related to home loans. “The deduction on interest on home loan will be reduced by the amount of relief that the government will be giving," said Swar Pathak, a Ludhiana-based chartered accountant.

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