Did not skip EMI during locking? Get cashback from your bank: the government

(This story originally appeared in October 24, 2020)

That government Friday spelled the details in waiver of interest on interest on loans up to Rs 2 crore where borrowers had taken moratorium during lockdown and also made it clear that those who did not choose to do so will receive an ex gratia payment or a cashback.

Payment is made to small businesses and individual borrowers with loans up to Rs 2 crore.

That Ministry of Finance Friday wrote to all RBI-regulated lenders saying the government has approved a “scheme for granting ex gratia payment of the difference between simple interest for six months to borrowers on specified loan accounts” between March 1 and August 31, 2020 Lenders include banks, cooperative banks, home finance companies and microfinance institutions.

This follows the government’s statement in SC that it is willing to bear the difference between simple and compound interest on loans during the moratorium period.

Waiver of interest of interest can cost Rs 6,500 crore

This included compensation to those who paid on time and therefore did not have to pay compound interest. Government sources had estimated the cost of waiving interest rates at around Rs 6,500 crore. Under the public scheme, even borrowers who have paid on time receive an amount equal to the difference between the simple interest rate they paid and the nominal compound interest rate on their outstanding loan per annum. End of February 2020.

To avoid legal complications, the government has said that the payment does not constitute a “contractual, legal or equitable obligation for the state and is only an exgratia payment”.

The government has specified the eligible personal loans by stating education, housing, consumer durability, credit cards and car loans. All MSME loans would also get exgratia or cashback into their accounts. Borrowers who used the six-month moratorium will be compensated for the compound interest they would be charged by the banks, while those who paid on time would receive the nominal interest on the interest they paid as cashback.

According to the back of the envelope calculation from bankers, anyone who has paid EMIs on a Rs 1 crore mortgage on time would be entitled to around Rs 16,000 in ex-gratia payment. This assumes an interest rate of 8%, which would result in a half-year interest rate of Rs 4 lakh and a compound interest rate of Rs 16,269.

The government has said that banks will credit the amount to the customer’s account and later demand it from the government. If the borrower has repaid the loan in full in between, the benefit is calculated for the moratorium where the loan was outstanding. The interest rate is the rate contracted in the loan agreement.

For credit cards, banks calculate the weighted average lending rate for transactions purchased on an EMI basis from customers. For the sake of uniformity, lenders have been asked to make all their calculations of the outstanding loan balance per. February 29, 2020.