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    Credit alert: Understanding the moratorium math

    Synopsis

    Government will pay the difference between compound interest and simple interest over the moratorium period. This is expected to cost the government Rs 6,500 crore .

    Interest on interest waiver: How much do you stand to save?
    Over the next 10 days, banks will start crediting money to borrowers who had availed the six-month Covid-19 loan moratorium, compensating them for the interest-on-interest levied during the period. The eventual cost will be borne by the government and expected to cost over Rs 5,000 crore. ET takes a look.

    The Moratorium
    Period: 6 months (March 1 to August 31) Banks began debiting EMIs from September

    The Mechanism
    • Interest continued to accrue on outstanding portion of loan
    • This interest is added to outstanding loan at the end of moratorium period
    • This amount becomes the new loan/principal going forward
    • Repayment schedule is reworked

    How much is the benefit?
    • Assuming a 7.5% interest and full six month moratorium

    1

    Interest-on-interest
    • Borrower pays interest on the interest, or compound interest
    • This is because interest due every month is added to the loan amount
    • For successive months, interest is charged on the higher principal
    • This means borrower pays interest on the interest accumulated during moratorium period

    The Relief
    • Govt will pay the difference between compound interest and simple interest over moratorium period
    • Banks will credit this amount to borrowers’ accounts
    • Rs 6,500 crore Total expected cost to govt

    Who is eligible?
    • Available to all borrowers
    • Even those who did not avail of moratorium or partially availed of it will get payment assuming they had taken one
    • Borrowers with loans up to Rs 2 cr as on February 29 covered

    2

    The Calculation
    • Rate of interest applicable will be as on February 29
    • In case of credit cards, it will be weighted average rate charged on EMIs during this period
    • Outstanding amount as on February 29 will be used for calculation
    • Repayments made during the period will be ignored for uniformity
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    21 Comments on this Story

    Er.sanjeev Koul30 days ago
    It isnt more than a plate of sàmosas as pandemic relief.zGovt wants to do nothing for middle class.But still some samosas are there.
    Ranjith Mp31 days ago
    Well it is not a favour, actually interest on interest and occured due to pandemic. Govmnt and RBI induced lock down and morotorium that lead to compound interest.actually the simple interest should be waved off. And morotorium extended. Hoping a verdict moreover like this from Hon supreme court.the money govmnt is issuing is people's tax amount.
    Gulzar Ahmad31 days ago
    KCC jkbank
    The Economic Times