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Home / Money / Personal Finance /  Govt’s ex-gratia payment catches diligent credit card customers by surprise

Some diligent credit card customers were surprised at the start of this month when they received a message from their issuers informing them that the government’s ex-gratia money has been credited to their accounts. They were taken aback as they had paid their dues on time and were not expecting the ex-gratia money that has been announced for the moratorium period between March and August. Many thought their issuers had made a mistake. The same was the case with those who surrendered their credit cards during the moratorium period or cleared off their loans in the past eight months.

Banks are paying customers who had an outstanding bill amount as on 29 February 2020. In other words, if you spent through your card before 29 February, you would be eligible for the ex-gratia money even if you cleared your bill within the due date but after 29 February. The same is true for those who surrendered their cards or repaid loans after 29 February.Some banks, like Standard Chartered Bank, claimed that they are not giving ex gratia payment for credit card holders as they didn’t charge “interest on interest".

Let’s look at the whole process in detail to understand it.

What is it?

The covid-19 pandemic affected the financial situation of many households. Businesses were shut and many employees were either laid off or their salaries were cut. Due to the financial stress, the Reserve Bank of India (RBI) offered six months’ moratorium to borrowers and credit card customers.

The moratorium allowed borrowers to postpone repayment of loans for six months. They could choose not to pay equated monthly instalments (EMIs) during the six months. To be sure, this was postponement of EMIs and not a waiver, so lenders added the interest accrued during the moratorium period to the loan’s principal amount.

Take the example of a borrower who had a car loan EMI of 10,000 and an outstanding of 4 lakh. An EMI comprises of principal and interest portions. Say, out of 10,000,the interest portion was 1,000. After six months, the interest accrued on the loan will come to 6,000, which lenders added to the principal. The new outstanding for the borrower after the moratorium ended would be 4.06 lakh. Lenders recalculated the tenure based on the new principal and, consequently, many saw an increase in the term of the loan in lieu of the “interest on interest" charged.

To provide relief to borrowers, the finance ministry came up with a scheme. According to this, retail borrowers and small business who have loans up to 2 crore won’t need to pay the compounded interest or interest on interest that accrued during the moratorium period. The ministry made the scheme available to all borrowers and credit card customers, whether they availed moratorium or repaid on time.

For this, the government decided on a formula. Through RBI, the ministry asked banks to reimburse the difference between the compound and simple interest on loans to eligible borrowers.

The amount

As banks started crediting the money, many credit card customers posted the amount they received. Some mentioned that they received a credit of a paltry sum of 10 or lesser amounts. The amount of money received depends on the outstanding balance and the interest rates.

Take an example of someone who had an outstanding credit card amount of 1 lakh as on 29 February and the bank charged him an interest of 3% each month or 18% for six months. If you calculate the simple interest on the outstanding, it would be 18,000. But if the interest is compounded, it would come to 19,405. The bank paid the card holder the difference between the two amounts, which is 1,405. But if the 1 lakh was a personal loan at 18%, the payout would be 344. These are just examples based on certain assumptions to explain the methodology. The real payout could vary depending on different factors.

If your lender has not made any payment, approach the institution if you have a retail loan, including home, auto, two-wheeler, personal, consumer durable and education loan, or had credit card outstanding as on 29 February.

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