Hyderabad: No interest will be levied on the interest for the six-month moratorium from March 1 to August 31. Those who have opted to pay the EMI during the moratorium will get a proportionate cashback. The new guidelines, issued last week, imply that borrowers, however, will to pay the principal and interest as earlier.
Reserve Bank of India had in March announced a moratorium on repayment of EMIs and credit card dues for three months and later extended it by another three months till August 31. Interest on interest or compound interest has been a bone of contention between the lenders and borrowers. The lenders said not levying interest on the outstanding was against the lending norms. The borrowers, on the other hand, said interest on interest during moratorium did not give any relief and defeated the purpose of the moratorium.
Following the Supreme Court’s intervention, the Centre has approved a scheme to ‘grant of ex-gratia payment’, which is the difference between compound and simple interest to borrowers of specified loan accounts, for six months. This should be credited by November 5.
Borrowing s up to Rs two crore taken across micro, small and medium enterprises (MSMEs), education, housing and consumer durables, credit card dues, auto, personal and professional, and consumption are covered. The rate of interest will be as per the rate mentioned in the loan agreement, in the case of education, housing, automobile, personal, and consumption loans. In the case of credit card dues, the interest rate will be the weighted average lending rate (WALR) charged by the card issuer for transactions financed on an EMI basis from its customers from 1 March-31 August. Not collecting the interest on interest will need the Centre to spend about Rs 6,500 crore for the implementation of the scheme.
The loan repayment will continue as per term and the borrowers will have to pay back the principal amount and the simple interest that one would have paid if they had not opted for the loan moratorium. The only tweak is there will be no interest on the interest.
There are no real savings as the principal that borrowers have taken and the interest they have to pay on that has not changed. Only, additional interest on this interest, which was intended to be levied, will not be required to pay.
“This waiver is small and borrowers who had availed a moratorium will still have to figure out their near-term finances. For borrowers with large dues especially, it would be prudent to make principal pre-payments periodically to erase the additional debt that accumulated due to the moratorium,” said Adhil Shetty, CEO, BankBazaar. Com
This amount is likely to be adjusted against the outstanding. “There will be a need for special software to handle the ex-gratia amount. These transactions will have to be explained to the customers,” said a bank official a member of an employee union. He said those with a higher outstanding will save themselves from the higher interest outgo.
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