Things to know about govt ‘interest on interest’ relief3 min read . Updated: 29 Oct 2020, 08:10 AM IST
Borrowers who had a loan up to ₹2 crore as on 29 February are eligible for the relief on ‘interest on interest’
The Reserve Bank of India (RBI) on Monday issued the operational guidelines for lending institutions related to the government’s scheme of giving ex-gratia “interest on interest" benefit to all borrowers. The measure has been announced to provide some relief and financial support to borrowers who may be facing financial difficulties due to covid-19.
“The relief of ‘interest on interest’ is a very welcome measure and will go a long way in alleviating covid-19 related financial distress for borrowers. All in all, the initiative will benefit the relatively smaller borrowers the most," said Raj Khosla, founder and managing director, MyMoneyMantra.com, an online financial marketplace.
But who will benefit from the scheme? Just the borrowers who opted for the moratorium or everyone who has a loan? How much will the benefit work out to? We answer some common queries about the new government scheme.
Who will benefit?
The benefit is available to 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.
Is it available only to those who opted for the moratorium? The benefit is available to all borrowers, irrespective of the fact whether you have opted for the moratorium or not, provided you paid your equated monthly instalments (EMIs) regularly before 29 February. In case you defaulted on EMIs before 29 February and your loan has become a non-performing asset, you will not be eligible for it.
Will it benefit people whose loan ended during the moratorium? You will benefit even if your loan account is closed now. As per government guidelines, all eligible borrowers with a loan amount outstanding as on 29 February will get the benefit. “The amount will be credited to the loan account of the borrowers. For those whose loan accounts have since been closed, the amount will have to be paid as per the borrower’s instructions to his savings or current account," said Gaurav Gupta, founder and chief executive, MyLoanCare.in, an online marketplace for financial products.
Will it benefit borrowers of consumer durable loans? Yes, even borrowers of consumer durable loans, where no interest is being charged, will benefit. “This will also benefit those who had availed loans under for no-cost EMIs," said Gupta.
What is the benefit?
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 central bank provided the EMI moratorium facility for six months from March to August, where borrowers were allowed not to pay EMIs, but interest continued to accrue during this period and was added to the principal outstanding at the end of the moratorium period, thus increasing the burden on the borrowers. Now, the interest accrued on interest will be paid by the government under the scheme.
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 the 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.
The amount of relief will vary from borrower to borrower depending on multiple factors, including the tenure of loan, interest rate and loan amount.
“The government has provided relief to borrowers with up to ₹2 crore of aggregate credit outstanding. The good part is that no sub-limits have been specified within the ₹2 crore overall limit as was being speculated earlier. For a ₹50 lakh home loan at 8%, this amounts to an overall relief of around ₹3,363. For a ₹2 crore MSME (micro small and medium enterprises) loan at 10%, this amounts to a relief of around ₹21,066," said Gupta.
When do you get it? Lenders are required to credit the entire ‘interest on interest’ relief amount to the borrowers’ loan accounts by 5 November and then claim a reimbursement from the government of India by 15 November.
The scheme is sure to provide some relief to the borrowers amid the festive season.