The Covid – 19 pandemics-related lockdown inflicted tremendous financial stress on our economy and affected the income of the common man. Understanding the anxiety of loan borrowers, during this period, RBI offered loan moratorium facility to aggrieved borrowers.
The loan moratorium implies the borrower is relieved of paying EMIs for a specific period (a kind of EMI holiday).In giving major relief to borrowers, government announced cashback benefit or interest waiver(compound interest) to all eligible borrowers. Loan moratorium is implemented initially for three months period that was later extended by another three months till 31st August 2020.
How does loan moratorium pan out?
Loan moratorium offered by RBI was for six months between 1/03/2020 to 31/08/2020. During this period, with a vision to give relief to borrowers, the Central government directed the lenders to waive off interest on interest (Compound interest) on the principal amount and collect only the simple interest. Further, the lenders can claim the reimbursement (of the difference between the simple interest and the compound interest) from the central government.
The loan moratorium scheme initiated by the RBI is implemented across the board to all the segments of standard loans. The scheme applies only to loans up to Rs. 2crore, whereas loans above Rs. 2crore are not eligible to avail the loan moratorium facility.
Who can avail the loan moratorium scheme?
The eligible borrowers who stand to benefit from the loan moratorium scheme are:
- MSME loans (under Rs. 2 crores)
- Housing loans
- Education loans
- Credit card dues
- Consumer durable loans
- Automobile loans
- Personal loans
- Consumption loans
- If the outstanding loan amount exceeds Rs 2 cr, the scheme doesn’t apply to the borrower, and he/she gets no relief.
- As on February 29, 2020, the loan account(of the borrower) should be standard(no NPA).
- Loans availed after- February 29, 2020, can not benefit from the scheme.
- A borrower is eligible to the loan moratorium scheme even when he/she has fully(6 months), partially, or not at all availed the moratorium limit on EMIs.
- Borrowers have to pay: Only the ‘Simple interest’ on the outstanding loan as on 29th February 2020.
- Borrowers have paid: Compound interest on the outstanding loan as on 29th February 2020.
- Cashback: The difference between the compound interest and the simple interest for the moratorium period of six months (March to August).
The process so far
The method employed by the government to provide relief is:
- Consider the outstanding loan amount as on 29th Feb 2020
- Take into account the interest rate to be charged(vary on different types of sanctioned loans)
- Now, calculate the compound interest on the loan for six months(moratorium period)
- Calculate the simple interest on the same amount for six months(moratorium period)
- Relief amount- Difference between the compound interest and the simple interest (for six months period)
- By November 5th, 2020, the relief amount will be credited to the borrower’s account.
- The banks will get the reimbursement from the government for the relief amount.
Loan amount as on 29thFeb, 2020
Interest rate as on 29thFeb 2020
Outstanding tenure as on 29thFeb 2020 (in months)
Moratorium Availed (in months)
Compound Interest during the Moratorium period
Simple Interest during the Moratorium period
Ex-gratia payment to be credited to the loan account(the amount to be credited to borrower’s loan account)
Points to remember
- Under the scheme, the financial institutions will auto-credit the ‘Relief amount’ in the borrower’s account.
- Only the outstanding loan as on 29th Feb 2020 will be considered for computation.
- Every loan borrower from financial institutions gets the relief irrespective of applying for the moratorium or not.
- For different types of loans such as automobile, consumer loans, education loans, personal loans, the interest rates vary (depends on the loan agreement)
- The loan moratorium scheme is applicable only to loans (amount) up to Rs 2 Cr and not higher.
- The relief amount will be credited on or before 5th November 2020.
- A grievance redressal mechanism will be established for the process, and significant responsibility is assigned to SBI.
- The financial institutions can claim reimbursement from the Central government latest by December 15, 2020 subject to audit.