Who is eligible for compound interest waiver during moratorium and how much will be the benefit

The government has announced guidelines for the waiver of compound interest that was payable by borrowers who had opted for moratorium on their loan equated monthly instalments (EMI) between March 1, 2020 and August 31, 2020.

The central government had earlier filed an affidavit in the Supreme Court stating that it would waive interest on interest on loans up to Rs 2 crore for select category of borrowers.

• Eligibility criteria for waiver of interest on interest

As per the announcement made following are the criteria to be eligible for the scheme:

a) MSME loan, Education loan, housing loans, consumer durable loans, credit card dues, automobile loans, personal loans to professional and consumption loans are eligible under the scheme
b) The loan amount should not exceed Rs 2 crore - aggregate of all the facilities from the lending institutions
c) The loan account should be standard account as on February 29, 2020
d) The lending institution should be either banking company, public sector bank, co-operative bank or regional rural bank, All India Financial Institution, Non-Banking Financial Company, Housing Finance Company.
e) The payment will be made to the borrower's loan account irrespective of whether the borrower has fully availed, partially availed or not availed the moratorium. Thus, even if you have not opted for the moratorium, then also you are eligible under the scheme.
f) Under the scheme, the difference between the compound interest and simple interest will be credited to the borrower's loan account for the period between March 1, 2020 and August 31, 2020 (Six months/ 184 days).
g) The interest rate on which the computation would be worked out will be as on February 29, 2020.

The lending institution is required to credit the amount to the borrower's account by November 5, 2020.

How will interest on interest waiver scheme work?
Shalini Gupta, Chief Strategy Officer, MyLoanCare.in, an online loans marketplace says, "If you have opted for the six-month moratorium, then the interest portion of your EMI will be added to the outstanding principal component and the new EMI is calculated for the remaining loan tenure. Normally, the interest is calculated using a compounding formula, which means you pay interest on accrued interest as well. However, under the waiver scheme, a borrower is required to pay simple interest instead of compound interest on the outstanding loan amount during the moratorium period which means a lower interest burden on the borrower. The difference between the simple interest (which is offered under the scheme) and compound interest (a normal banking practice) will be borne by the government irrespective of whether the borrower has availed moratorium or not. This essentially also benefits the borrowers who were able to service their EMIs diligently even during the moratorium period."

"By and large borrowers with older loans will benefit less than those who have just started repaying their loans. This is because normally when repayment of a loan starts then the proportion of interest component in EMI is high and the principal component is low. Whereas when the loan tenure gets closer to the finishing line the interest component is low and principal component is higher. In the situation when the interest portion is high obviously the compound interest will also be high therefore those with high interest portions in their EMIs will gain more from the waiver", says Gupta.

How much do you save from the waiver?
Gupta says, "The amount of waiver benefit you get under the scheme will be directly proportional to the amount of interest you had to pay during the moratorium which in turn is a function of original loan amount and interest rate. This essentially means that the proportion of benefit on different loans amount taken at same interest rate will be the same."

Given below is the illustration of how much a borrower would save for different loan amounts due to waiver of compound interest payable.

Outstanding Loan Amount at the beginning of moratorium	30 Lakhs	50 Lakhs	70 Lakhs
Interest Rate	7.50%	7.50%	7.50%
Interest for 6-month moratorium period- with compound interest (A)	Rs. 1,14,272	Rs. 1,90,455	Rs. 2,66,635
Interest for 6-month moratorium period- with simple interest (B)	Rs. 1,12,500	Rs. 1,87,500	Rs. 2,62,500
Net Savings due to waiver of interest on interest (C)=(A-B)	Rs. 1772	Rs. 2995	Rs. 4135
% savings (C/A) *100	1.6%	1.6%	1.6%

Source: MyLoanCare.in
(Monthly interest rate for loan = Annual Interest rate/12) = 7.50/12 =0.625%

• If the loan amount is Rs 30 lakh

From the table above, if outstanding loan amount on February 29, 2020 is Rs 30 lakh, then the calculation would be worked out as follows:
Interest for 1st Month (A) = Loan Principal Outstanding x Monthly Interest Rate/100
= (30,00000*0.625)/100= Rs.18,750
Interest for 2nd Month (B) = (Loan Principal Outstanding + A) x Monthly Interest Rate/100
= (30,00000+18750) * 0.00625= Rs.18867
Interest for 3rd Month (C) = (Loan Principal Outstanding + A+B) x Monthly Interest Rate/100
=Rs. 18985
Interest for 4th Month (D) = (Loan Principal Outstanding + A+B+C) x Monthly Interest Rate/100
=Rs. 19104
Interest for 5th Month (E) = (Loan Principal Outstanding + A+B+C+D) x Monthly Interest Rate/100
=Rs. 19223
Interest for 6th Month (F) = (Loan Principal Outstanding + A+B+C+D+E) x Monthly Interest Rate/100
=Rs. 19343
Total interest under moratorium if 6 months of moratorium is opted for = (A+B+C+D+E+F) = Rs. 1,14,272 (18,750+ 18867+18985+19104 +19223 + 19343)

As per the scheme, borrower is required to pay simple interest which will be calculated as follows:
SI=P*R*T= (3000000*7.5*0.5)/100 = Rs 1,12,500
The difference that will be credited to your account: Rs 1772