Post-moratorium phase: Get interest credit on loans and reassess personal debt

Aparna Ramachandra

The COVID-19 pandemic’s spread and the lockdown did take a toll on the economy. As business restarts, there are expectations of limping back to normalcy. We are all aware of the moratorium that the RBI announced for three months and which got further extended by another three months. Now all of it is over.

We now have to deal with the real stuff. Many borrowers opted for a moratorium out of anxiety and fear of the unknown. Though their cash flows etc. were never hit, the fear of ‘what next’ resulted in a knee-jerk reaction. Initial confusion over what exactly was a moratorium further accentuated the chaos.

Now the government is working out a plan to provide some relief to borrowers. As per the plan, ex-gratia payment will be provided to eligible borrowers to compensate the difference between simple and compound interest paid during the six-month moratorium period. The difference between the compound interest and simple interest to all borrowers with loans up to Rs 2 crore for the six-month period will be reimbursed. This is for borrowers with outstanding loans — as of February 29, 2020 — of less than Rs 2 crore. This is for all borrowers whether or not they opted for the moratorium.

Getting interest credit

The ex-gratia amount will be automatically credited into the accounts of eligible borrowers. The moratorium was offered by the banks to customers who had no pending dues or had never defaulted. However, the Government is offering this ex-gratia relief to even those that are overdue for less than 90 days, but are not NPAs. Hence loans declared as non-performing assets as on February 29, 2020 are not eligible under the scheme. So the NPA accounts didn’t get the moratorium benefit nor are they eligible now for this relief.

During the moratorium, the borrower paid compound interest, that is, interest on interest as interest due every month got added to the total loan amount. Subsequently, when interest was charged on that higher principal for successive months, borrowers ended up paying interest on the interest that got accumulated during the period. The Supreme Court was concerned about the plight of the borrowers especially with Diwali and other festivals being around the corner. Hence, the government has asked lenders to credit the amount to eligible borrowers latest by November 5, 2020.
Almost all the type of loans have been covered under this relief plan. They include: MSME, education, home, consumer durable and car loans, and credit card dues, consumption and personal loans to professionals.
However loans taken against fixed deposits, bonds and shares are not eligible for this ex-gratia relief. Loans against securities won't be eligible for relief as these are used by traders to take leveraged positions in the stock market and the Government is clear that they don’t need this relief.

The plan covers outstanding amounts on credit cards. However, those credit card holders with a card balance in ‘credit’ won't be eligible. A ‘credit’ balance pertains to overpayment, which means the bank owes the card holder money. There is a very clear explanation that for credit cards, the amount will be calculated based on the interest rate charged by the bank for converting the outstanding amounts into EMIs. So this will vary between 1.5 percent and 2 percent. EMI interest rates are much lower than the interest charged for credit card dues. Banks can charge as high as 48 percent per annum. It is clarified that banks will not calculate on this rate.
Loan accounts that were closed during the six-month moratorium period will also be eligible for the relief. In such cases, banks have been told that the interest differential will be calculated from March 1 till the date the loan was closed.

For ongoing loan accounts, the amount is to be credited into the loan account. Where the loans have been closed, the amount will be credited into the savings/current accounts of the borrower. In case the borrower no longer holds any savings/current accounts with the lending bank he/she can give the bank an account of their choice for the credit.

Reassessing personal debt

Now, as we move along, it is advisable for most borrowers to take a hard look at their loans. Most lenders had on their own increased loan tenures by two years, and with interest rates falling, the EMIs had reduced compared to the pre-lockdown period. This was done to ensure that borrowers didn’t feel the burden and avoided having a negative effect on cash flows. This decision also ensured banks had lesser defaults.

If your cash flows have not been hurt, avail all such benefits and over the next few months try and pre-close the loans. You need not continue paying the EMIs for two more years only because the bank has given you the option.

Repaying/pre-paying will ensure that your cash flows are eased, your overall borrowing limits increase and you prove your intention of repaying. That will help you stay ‘credit worthy.’