In the wake of difficulties faced by numerous borrowers during coronavirus-related lockdown, the union government has decided to offer relief to retail and MSME borrowers who had active loan accounts during the period March 1, 2020 to August 31, 2020. All eligible borrowers will receive an amount of relief, which will be the difference between simple interest and compound interest during the six-month period from March to August 2020, in their respective account by November 5, 2020.
Pushed by the Supreme Court, this may appear to be a good relief for the borrowers. "This will help in alleviating some of the financial burden faced by individual and MSME borrowers hit hard by the pandemic and consequent lockdown. We hope this will bring some cheer on the faces of the borrowers during this festival time and hopefully also help lenders recover some of their dues," says Mayur Modi, Co-founder and Co-CEO, Moneyboxx Finance Ltd.
However, when you dig a little deeper the picture does not look rosy for borrowers. Going by the basic method of computation, the benefit for retail borrowers appears to be marginal. For example, if you have a home loan which had an outstanding of Rs 40 lakh, the difference between the compound interest and simple interest at 8 per cent for the concerned six-month period comes out to be only Rs 2,690. It means that while the borrowers will bear the burden of Rs 1.6 lakh interest payment during the period, the relief they will get through government under this scheme is only Rs 2,690.
When it comes to other small-ticket loans like auto loan, personal loan and consumer durables loan, the actual benefit that the borrowers get will be much lower.
Which loans are eligible
This relief is limited to only specific types of loans, including MSME loans, education loans, housing loans, consumer durables loans, credit card dues, automobile loans, personal loans to professionals and consumption loans.
More clarity will be needed on personal loans as only one type of such loan - for professionals - has been mentioned in government notification. However, the notification also covers consumption loan which has not been elaborated whether all personal loans will fall under this category or not.
Moreover, not only term loans but other credit facilities like overdraft, cash credit and revolving credit of a credit card are also eligible for this benefit and.
Conditions for relief eligibility
To be eligible for this relief the loan account should not have been a non-performing asset (NPA) on February 29, 2020, which means it should have been categorised as standard regular asset by lender on this date. In other words there should not be any default on repayment by the borrower till February end this year.
"So for any borrower who has maintained their account in standard state and has been making timely payments pre-COVID is eligible for this credit. For the customers who opted into moratorium, they will be just required to pay the simple interest in their outstanding and any compounded interest will be waived by the financial institution," says Anil Pinapala, CEO, Vivifi Finace India.
The aggregate loan outstanding amount including all lending facilities through all lending institutions should not be more than Rs 2 crore on February 29, 2020. While the majority of retail borrowers will not be impacted by this limit, many MSME borrowers will lose their eligibility when total outstanding with all lending institutions will be considered.
Interest rate calculation may vary
When it comes to term loans, the interest rate prevailing on February 29, 2020, will be taken for calculating the difference between simple and compound interest. This will remain same even in cases where the interest rate changed during the following 6 months period. This will increase the benefit for floating rate loans like home loan which witnessed reduction of interest rate but will get the reimbursement at higher rate.
For the overdraft or cash credit facility the simple interest would be calculated on daily balance for the concerned six-month period at the interest rate prevailing on February 29 this year. However, the compound interest will be calculated at monthly interval for the same period.
The methodology for charging credit card dues is totally different as for credit card dues the interest rate which will be used is Weighted Average Lending rate (WALR) charged by the lender on EMI facilities and not on revolving credit. It means that the interest rate used will be much lower because the rate charged on EMI conversion are much lower than the ones charged on revolving credit.
Not related to moratorium exercise
All types of borrowers, whether availed the loan moratorium for full six months or only for few months or did not avail the moratorium will be eligible for this interest relief. This relief will apply even to those borrowers who closed their loan accounts in the middle of this period by completing the repayment. If the loan was closed during this period then the amount will be calculated only till its last day of closing.
"This measure is being implemented in a fashion that it is uniformly applicable to all borrowers and doesn't put the good paying customers at any disadvantage and this particular aspect has to be highly appreciated," says Pinapala of Vivifi Finace India.
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