Interest relief: A simple scheme with wide coverage, say experts

The quantum of benefit for borrowers, however, will not be very large

The central government’s scheme to pay borrowers interest on interest is set to bring some relief to borrowers who availed of the moratorium, as it covers all types of loans, and does not require customers to submit applications to be eligible to get the benefit. However, experts say the quantum might not be very high.
 
Wide coverage: The government will reimburse customers for an amount equivalent to the difference between the compound interest and simple interest, or interest on interest, on specified loan types for a period between March 1 and August 31.
 
One positive feature is that the borrower does not have to do anything. “Nowhere in the circular does it say that the customer has to apply. If that were the case, it would have explicitly said so, and it would have also provided a deadline for applying,” says Aditya Mishra, founder and chief executive officer (CEO), SwitchMe, a digital home loan broker.
 
All borrowers whose loans were standard on February 29 will get the benefit. “The scheme does not differentiate between borrowers who ava­iled of the full moratorium, partial moratorium, or did not avail of the moratorium at all,” says Deepesh Rag­haw, founder, Personal­Finance­Plan, a Securities and Exchange Board of India-registered investment advisor. Only borrowers with a loan am­ount exceeding Rs 2 crore have been excl­uded. 
 
According to a Crisil analysis, the total benefit will amount to Rs 7,500 crore, and more than 40 per cent of systemic credit and 75 per cent of borrowers will gain from the scheme.

 
Lenders have to credit the amount into customers’ accounts by Nove­mber 5. After that, they will have to submit a claim to the government via the State Bank of India. “No long waiting period is involved for borrowers,” says Raghaw. Even someone who paid off their loan during the period will benefit. In this case, she will get an amount equivalent to the interest on interest that accumulated between February 29 and the date of closure of the account. The government has created a simplified mechanism, so as not to make implementation difficult. Whatever was the outstanding loan and interest rate on February 29, those figures will be used to calculate the compound and simple interest. Changes to either after that date will not be taken into consideration.
 
Unintended beneficiaries: Borr­owers who availed of a moratorium because of their own financial difficulties, and not because of Covid, will also get to benefit from the scheme. Suppose that someone with a home loan of Rs 1.5 crore took a moratorium in January, not because of the pandemic, but because of their own financial difficulties. They decided not to service the home loan for a 12-month period and promised to make a bullet payment in January 2021. “Such bullet payment arrangements are common in home loans. Even such people will benefit from this scheme,” says Mishra.  The benefit amount will be higher in case of loans like credit card, where the interest rate tends to be higher.
 
Quantum won’t be large: The quantum of benefit, however, will not be large. Take the case of a borrower with an outstanding of Rs 50 lakh on February 29, with interest rate of 7.5 per cent. At the end of six months, the interest on interest on his loan will be just Rs 2,954. As a percentage of the loan outstanding, the benefit in this example is rather small at 0.06 per cent.