Credit alert: Understanding the moratorium math


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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