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Compound interest waiver during moratorium: Eligibility and Benefits

Rajdeep Saini

| Updated: Nov 13, 2020 | Category: Taxation

Compound interest waiver

The Central Government has announced certain guidelines for the waiver of compound interest, which was allocated by borrowers, who chose for a moratorium on their loan connected with easy monthly installments (EMI) from 1st march 2020 and 31st August 2020.

Compound interest waiver

The Union Government had formerly filed an affirmation in the Supreme Court saying that it would waive off interest on interest on the loans up to Rs 2 Crore for a selected category of the borrowers.

The under signed is bound to convey that in view of the unparalleled and extreme Covid-19 situation, the Union government has accepted ” the Scheme for allowance of ex-gratia payment of the difference between simple interest and compound interest for six months to the borrowers in particular loan amounts. All the remuneration under the scheme would be in retreat through the lending establishment,” the Finance Ministry stated in its official order.

Eligibility criteria for compound interest waiver on interest

As per the declaration made by the ministry, the following are the eligibility criteria for the scheme:

  • Education loan, MSME loan, consumer durable loans, housing loans, dues of credit cards, personal loans to professional loans, automobile loans, and consumption loans are qualified under this scheme.
  • The amount of loan shall not surpass the value of Rs 2 Crore – a total of all the amenities from the lending establishment.
  • The account of the advances should be a typical account as of 29th Feb 2020.
  • The lending establishment must be a public sector bank, banking company, regional rural bank or co-operative bank, All India Financial establishment, Non-Banking Financial Company (NBFC), or a Housing Finance Company.
  • The reimbursement will be made to the loan account of the borrowers, no matter whether the borrower has fully availed of the benefits or partially availed it, or did not avail of the moratorium. Hence, even if you have not decided on the moratorium, then also all the persons will be eligible under the scheme of the Central Government.
  • Under this specific scheme, the disparity between the simple interest and compound interest will be accredited to the loan account of the borrowers for the time period between 1st March 2020 and 31st August 2020 (6 months or 184 days).
  • The rate of interest on which the calculation shall be worked out will be as of 29th February 2020.

The lending establishment is obligatory to credit the amount to the borrower’s account by 5th November, 2020.

How will interest in the compound interest waiver scheme work?

The Chief Strategy Officer[1] at MyLoanCare.in, an online marketplace for loans, Shalini Gupta states that “If you have selected for the 6 month moratorium, then the portion of Interest on your equitable monthly installments (EMIs) will be supplementary to the outstanding key component and the new EMI is calculated for the remaining tenure of the loan. Usually, the calculation of interest by the way of a compounding formula, which means you have to pay interest on accumulated interest as well. Nevertheless, under the scheme of waiver, a borrower is obligatory to pay compound interest of simple interest on the outstanding loan sum during the moratorium period which means a minor interest burden on the borrower financial health. The dissimilarity between the simple interest (which is accessible under the scheme) and the compound interest (a standard banking practice) will be abiding by the government, irrespective of the fact that it has been availed by the borrowers moratorium or not. This fundamentally also paybacks the borrowers who were able to service their easy monthly installments thoroughly even during the period of the moratorium.”

“All the borrowers who have old kept loans promote less than those who have now started to repay their loans. This is because in a normal course when the repayment of an advance starts then the percentage of interest component in EMI is elevated and the principal component is short. Whereas when the tenure of the loan gets near to the finishing line the component of an interest is low and the major component is high. In the situation, where the interest segment is high noticeably the compound interest will also be soaring consequently those with high-interest portions in their easy monthly installments will expand more from the waiver”, stated Shalini Gupta.

How much do you save from the Compound interest waiver scheme?

Gupta adding on, the amount of profit out of the interest waiver any person who gets under this scheme will be unswervingly proportional to the interest’s amount one mandatorily had to pay during the time period of the moratorium which in turn is a purpose of actual loan amount and the interest rate. This fundamentally means that the amounts of advantage on different loans amount taken at a similar interest rate will equivalent.

Illustration of how much a borrower would save for different loan amounts due to interest waiver

The Outstanding amount of loan at the starting of the moratorium30 Lakhs50 Lakhs70 Lakhs
Interest rate7.5%7.5%7.5%
Interest for Six month moratorium period- with a compound interest (A)Rs. 114272Rs. 190455266635
Interest for Six month moratorium period- with simple interest (B)Rs. 1,12,500Rs. 1,87,500Rs. 2,62,500
Due of net savings to waive off interest on interest (C)=(A-BRs. 1772Rs. 2995Rs. 4135
% savings (C/A) *1001.6%1.6%1.6%

Conclusion


It is clear from the above discussion that the Central Government have come up with certain guidelines for the waiver of compound interest that was allocated by borrowers, who chose for a moratorium on their loan connected equitable monthly installments. There is no doubt that this move will help the individuals in this unparalleled and extreme Coronavirus situation, by allowing of ex-gratia payment of the difference between simple interest and compound interest for six months to the borrowers in particular loan amounts. Furthermore, government would waive off interest on interest on the loans up to Rs 2 Crore for the selected category of the borrowers.

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Rajdeep Saini

Rajdeep is a law graduate from Guru Gobind Singh Indraprastha University. During his law school he gained vast experience in corporate and commercial law. He likes traveling and performing stand-up comedy.

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