Explained: How the loan cash back scheme for borrowers works

Loan cash back scheme: A borrower with a Rs 50 lakh home loan outstanding, for example, will get a benefit of around Rs 12,425 in the form of savings on accounts of compound interest for a six months period, assuming the rate of interest at 8 per cent.

Lakhs of borrowers, irrespective of whether they availed of moratorium or not during lockdown, stand to get some cash back from the government soon as it has decided to come out with a proposal to provide relief in the form of ex gratia payment. The cash-back is the difference between the compound interest and simple interest which are applicable to certain categories of borrowers, including housing, credit card and MSMEs, for the period March 1, 2020 and August 31, 2020.

A borrower with a Rs 50 lakh home loan outstanding, for example, will get a benefit of around Rs 12,425 in the form of savings on accounts of compound interest for a six months period, assuming the rate of interest at 8 per cent. At this rate, six months simple interest cost comes roughly to Rs 2 lakh, and along with the compound interest it becomes Rs 2,12,425 — with the government paying the difference of Rs 12,425. All borrowers will have to pay simple interest to the banks. Exact waiver benefit will depend on the stage of the loan and outstanding principal amount.

What’s the government’s latest loan cash back proposal?

As per latest guidelines issued by the Finance Ministry to the banks, difference between the compound interest and simple interest for a period of six months will be provided to all borrowers with loans up to Rs 2 crore. In simple terms, borrowers need to pay only simple interest and the government will pay back the difference between compound interest charged during those six months and simple interest. The ex gratia payment under this scheme will be admissible irrespective of whether the borrower had fully availed or partially availed or not available of the moratorium on repayment. It is for those loan accounts which are standard and not non-performing assets (NPAs) as on February 29. For loan accounts which were closed during this period, the ex gratia payment will be made from March 1, 2020 till the date of closure of such account.

“In view of the unprecedented and extreme Covid-19 situation, the object of the scheme is to provide ex gratia payment of difference between compound interest and simple interest by way of relief for the period from March 1, 2020 to August 31, 2020 to borrowers in specified loan accounts. Such payment does not constitute a contractual, legal or equitable liability of the central government, the scheme says.

Who is eligible for the scheme?

The compound interest waiver is for most of the loans — housing, MSME, education, consumer durable, credit card dues, automobile, consumption and personal loans to professionals. Any borrower whose aggregate of all facilities with lending institutions is more than Rs 2 crore — sanctioned limits or outstanding amounts — will not be eligible for the waiver. The waiver will be provided by all private and state-owned banks, cooperative banks, regional rural banks, housing finance companies and non-banking financial institutions. The rate of interest used to calculate the ex gratia amount will be based on the contracted rate specified for most loans. The relief has been unveiled after the Supreme Court asked the government to come out with a relief on interest rates.

What’s the relief/incentive being offered to borrowers?

A waiver on levy of compound interest, or interest on interest, on home, car, MSME, personal and other loans up to Rs 2 crore may come as a major relief to borrowers, especially whose loans are in initial years of repayment as their interest component is a major chunk. This would help in reducing the burden on borrowers as they are required to pay the contracted rate of interest on loans. Since the moratorium on loan repayments announced by the Reserve Bank of India was not a waiver, borrowers were liable to pay interest and interest on interest on the accumulated amount. Customers will still have to bear the liability of simple interest accumulated during the six of the moratorium period. A senior finance ministry official said that ex gratia payment is being provided to even those who did not avail of the moratorium, in order to create parity among borrowers and to preserve the credit culture for timely repayments.

How’s the calculation done?

The government has specified that for reimbursement, the compounding of interest should be reckoned on a monthly basis. The rate of interest to be applied for calculating the difference will be the contracted rate as specified in the loan agreement. For credit card dues, the rate of interest will be the weighted average of lending rate (WALR) charged by the card issuer for transactions financed on the EMI basis from its customers during the period from March 1, 2020 to August 31, 2020. The computation of WALR should be certified by the statutory auditor of the card issuer. For education, housing, consumer durables, credit card dues, auto, consumption and personal loans are in the form of a term loan or demand loan and not an overdraft facility or cash credit, the outstanding in the account as on February 29, 2020 will be the reference amount for calculation of simple interest

Will the bank be able to handle it?

Bankers say that it’s not an easy task and involves more paperwork for banks and housing finance firms. There are lakhs of borrowers who are now waiting for the cash-back from the government. First, banks will have to process the claims of borrowers and credit the amount. They will have to lodge the claim for reimbursement with the designated cell at State Bank of India (SBI), which will function as the nodal agency for the scheme, by December 15, 2020. SBI will evaluate the claims and furnish the details to the government. Lending institutions will get the funds through SBI.

What’s the cost to the government?

According to experts, the cash outgo from the government is likely to be between Rs 5,000-7,000 crore as all the borrowers may not be eligible for the scheme. “Assuming not more than 30-40 per cent of the overall loans of the banks and NBFCs will be eligible for relief, the cost to the government should not exceed Rs 5,000-7,000 crore. This is assuming all borrowers are given relief irrespective of whether they are availing the moratorium or not,” said Anil Gupta, Vice President, ICRA Ltd. However, significantly, the government has not given any deadline on paying up the cash-back to the banks which will have to give the ex gratia to the borrowers in advance before submitting it to the government.

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