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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 .

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

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

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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