How the new loan repayment program works for borrowers

Lakhs of borrowers, whether or not they received a moratorium during the lockdown, are expected to get cash back from the government as soon as it decides to present a proposal for aid in the form of a payment to courtesy title. Cash-back is the difference between compound interest and simple interest that applies to certain categories of borrowers, including housing, credit card and MSMEs, for the period of March 1, 2020 and August 31, 2020 .

A borrower with an outstanding home loan of Rs 50 lakh, for example, will get an advantage of around Rs 12,425 in the form of savings in compound interest accounts for a period of six months, assuming an interest rate. by 8%. At this rate, the cost of simple interest over six months is around Rs 2 lakh, and with compound interest it becomes Rs 2 12,425 – with the government paying the difference of Rs 12,425. All borrowers will have to pay simple interest to banks. The exact benefit of the waiver will depend on the stage of the loan and the amount of principal outstanding.

Borrowers will have to pay simple interest

What is the government’s latest loan repayment proposal?

According to the latest directives issued by the Ministry of Finance to banks, the difference between compound interest and simple interest for a period of six months will be provided to all borrowers with loans up to Rs 2 crore. Simply put, borrowers only need to pay simple interest, and the government will reimburse the difference between the compound interest charged during those six months and the simple interest. Ex gratia payment under this scheme will be eligible whether or not the borrower has fully or partially taken advantage of the repayment moratorium. This is for loan accounts which are standard non-performing assets (NPA) as of February 29. For loan accounts that have been closed during this period, the ex gratia payment will be made from March 1, 2020 until the closing date. of such an account.

“Given the unprecedented and extreme situation of Covid-19, the purpose of the scheme is to provide free of charge the payment of the difference between compound interest and simple interest as relief for the period of March 1, 2020 as of August 31, 2020 to borrowers on specified loan accounts. Such payment is not a contractual, legal or equitable responsibility of the central government, depending on the scheme.

Who is eligible for the plan?

The compound interest exemption applies to most loans – housing, MSMEs, education, consumer durables, credit card contributions, automobiles, consumer goods, and personal business loans.

Any borrower whose total of all facilities with credit institutions is greater than Rs 2 crore – sanctioned limits or unpaid amounts – will not be eligible for waiver. The exemption will be granted by all private and public banks, cooperative banks, regional rural banks, housing finance companies and non-bank financial institutions. The interest rate used to calculate the ex gratia amount will be based on the contract rate specified for most loans. The relief was unveiled after the Supreme Court asked the government to offer interest rate relief. ?? Follow Express Explained on Telegram

What relief / incentives are available to borrowers?

A waiver of the charge of compound interest, or interest on interest, on home, auto, MSME, personal and other loans up to 2 crore rupees can be a major relief for borrowers, especially whose loans are in the first years of repayment as interest. component is a major piece. This would help to reduce the burden on borrowers as they are required to pay the interest rate charged on the loans. Since the moratorium on loan repayments announced by the Reserve Bank of India was not a waiver, borrowers were required to pay interest and interest on interest on the accrued amount.

Customers will still have to bear the responsibility for simple interest accrued during the six of the moratorium period. A senior finance ministry official said ex gratia payment is provided even to those who have not taken advantage of the moratorium, to create parity among borrowers and preserve the credit culture for timely repayments. .

How is the calculation done?

The government clarified that for repayment, the interest composition should be calculated on a monthly basis. The interest rate to be applied for the calculation of the difference will be the contractual rate as specified in the loan agreement. For credit card contributions, the interest rate will be the Weighted Average Borrowing Rate (WALR) charged by the card issuer for transactions funded on the basis of the EMI of its customers over the course of the period from March 1, 2020 to August 31, 2020. The calculation of the WALR must be certified by the auditor of the card issuer.

For education, housing, consumer durables, credit card contributions, automotive, consumer and personal loans come in the form of a term loan or demand loan and not an overdraft facility or a cash credit, the outstanding amount of the account as at February 29, 2020 will be the reference amount for the calculation of simple interest.

Don’t Miss Explained | Why has the government extended the filing dates for income tax returns?

Will the bank be able to take care of it?

Bankers say it’s no easy task and involves more paperwork for banks and housing finance companies. There are hundreds of thousands of borrowers now waiting for the government’s cash back. First, the banks will have to process the claims of the borrowers and credit the amount.

They will have to file the reimbursement request with the designated cell of the State Bank of India (SBI), which will function as the nodal agency of the program, by December 15, 2020. SBI will assess the requests and provide the details to the government. . Credit institutions will obtain the funds through the SBI.

What is the cost to the government?

According to experts, government cash outflows are expected to be between Rs 5,000 and 7,000 crore, as not all borrowers may be eligible for the program. “Assuming that no more than 30-40% of all bank and NBFC loans are eligible for relief, the cost to the government should not exceed Rs 5,000-7,000 crore. This assumes that all borrowers receive relief, whether or not they use the moratorium, ”said Anil Gupta, vice president of ICRA Ltd.

Significantly, however, the government has not given any deadline to pay the cash back to the banks, which will have to give the borrowers ex gratia in advance before submitting it to the government.

Bernadine J. Perkins