The ex gratia, announced by the government, is applicable to all borrowers regardless of whether they opted for the moratorium or not.
Last week, the Central government issued a notification announcing a waiver on compound interest during the period of the moratorium for existing retail loans below Rs 2 crore. Now, all borrowers who have MSME, education, home, consumer durables, credit cards, auto, personal, or consumption loans, as of 29 February 2020, will need to pay only simple interest on those dues between 1 March 2020 and 1 September 2020.
Any loan that is not an NPA as of 29 February 2020 is eligible for this ex gratia, and multiple eligible loans can be combined up to a limit of Rs 2 crore. These can be loans from commercial banks, cooperative banks, NBFCs, regional rural banks, etc. The amount is expected to be credited to the borrower’s loan account on or before 5 November 2020.
Typically, banks calculate interest on a monthly basis. This interest is added to the loan amount outstanding. As you keep paying your EMIs, the outstanding reduces and so does the interest amount. So, if you have Rs 10,000 at 10%, at the end of one month, you need to pay Rs 83 as interest. If you pay an EMI of say, Rs 1000, then your EMI is split into Rs 83 towards this interest and the remaining Rs 917 towards the principal. Therefore, the outstanding principal in the next month comes down by Rs 917, and the interest generated is also less. However, during the moratorium, no EMIs were paid. So the interest generated each month was added to the outstanding amount. Consequently, the outstanding amount went up every month instead of decreasing.
As a relief to borrowers, the government announced an ex gratia package for the period. Here, the outstanding would not be compounded every month, but instead would consider a simple interest for six months. The ex gratia is also applicable to all borrowers regardless of whether they opted for the moratorium or not. Hence, the interest would be calculated basis the rate of interest as on 29 February 2020. Assume you had a 20-year housing loan at 8.5% starting February 2018, for which the EMIs started in March 2018. So, even if your rate of interest has declined during the 6 months of moratorium, the calculation would not include those changes. So, if your home loan rate was 8.5% as on 29 February, and fell to 7.25% over the six months, the interest calculation would still consider the original 8.5% for calculation purposes. For the same reason, it will not take into account the reduction in outstanding.
In case of credit card dues, the rate of interest will be the Weighted Average Lending Rate (WALR) charged by the card issuer for transactions financed on EMI basis.
Now let’s evaluate three more cases.
Case 1: Home Loan: Assume a loan of Rs. 50 lakh for 20 years at 8.5%. On this loan, the first 12 EMIs are paid on time, and then EMIs 13 to 18 are deferred during the moratorium.
Case 2: Car Loan: 10 lakh for 6 years at 10%. On this loan, the first 12 EMIs are paid on time, and then EMIs 13 to 18 are deferred during the moratorium.
Case 3: Personal Loan: 5 lakh for 4 years at 13%. On this loan, the first 12 EMIs are paid on time, and then EMIs 13 to 18 are deferred during the moratorium.
As such, the actual difference in the three scenarios would be Rs. 3723, Rs. 917 and Rs. 710, respectively. The ex-gratia a borrower would be eligible for would be a very small amount compared to the actual interest generated on the outstanding amount due to the moratorium. So, it is essential that borrowers who opted for the moratorium provision for their near-term finances understand that the refund will not make any significant impact. In this situation, it would be prudent, especially for borrowers with large dues, to make principal pre-payments periodically to erase the additional debt that accumulated due to the moratorium. Paying 120% of their deferred EMIs within 12 months of the last deferred EMI would help achieve this.
(The writer is CEO, BankBazaar.com)