Moratorium mathematics: All you need to know

In the next 10 days, banks in India will start crediting money to the borrowers who had availed the 6-month Covid-19 loan moratorium, announced the Reserve Bank of India (RBI).

The RBI announced the moratorium to give relief to the companies and businesses that were hit by the Coronavirus pandemic induced lockdown and the economic crisis. The banks in India will credit the money to the borrowers who availed moratorium to compensate the interest-on-interest (compound interest) levied during the period.

As the experts and economists calculate, the eventual cost due to this compensation of compound interest for the moratorium period will lead to the central government losing Rs 6,500 crore. The central government will pay the difference between the compound interest and simple interest over the moratorium period.

Here, let us take a close look at the moratorium and the credit scheme as well.

Moratorium period

RBI announced a moratorium to give relief to the borrowers for six months between 1st March and 31st August. Banks began debiting the EMIs from September 2020.

Interest mechanism

• Interest continued to accrue on the outstanding portion of the loan.
• These interests are added to the outstanding loan at the end of the period.
• These amounts become the new loan or principal.
• The repayment schedule for the period is reworked.

Benefits of policy

With the assumed 7.5% rate of interest and a full six-month moratorium on the loan interest repayment what would be the benefits for a certain amount of loans.

Compound interest

• The borrowers pay interest on the interest, which is called compound interest.
• The compound interest is levied to the borrowers because interests due during every month of the period are added to the loan amount.
• For every successive month, interests are charged on the higher principal, leading to a higher amount.
• This means the borrowers pay interest on the interest (compound interest) which has been accumulated during the period.

Government relief from compound interest

• The central government has announced to pay the difference between compound interest and simple interest over six months of the moratorium period.
• The banks will credit this amount (Compound interest – Simple interest = ?) to the borrowers’ accounts.
• The central government is expected to incur around Rs 6,500 crore cost due to the relief to the borrowers.

Relief eligibility

• The relief package is available to all borrowers.
• Borrowers who didn’t avail moratorium or partially availed it will get credit payment assuming they had availed one.
• Borrowers who have taken loans up to Rs 2 crore as on 29th February 2020 are covered under this scheme.

What type of loans are covered

• Automobile loans
• Consumer durable loans
• Consumption loans
• Credit card loans
• Education loans
• Housing loans
• MSME loans
• Personal loans to professionals

Credit calculation

• Rate of interest applicable for the credit calculation will be as on 29th February.
• For credit cards, the credits will be calculated on the basis of the average rate charged on EMIs during the moratorium period.
• Credit calculation will take account of outstanding amount as on 29th February.
• Repayments made during the moratorium period will be ignored for uniformity.

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