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Huge relief for home loan borrowers if govt bears part of compound interest

The increase in EMI or tenure will be lesser if the government pays the compound interest

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If the government decides to take on the burden of compound interest upon itself, the savings to a borrower could be substantial. The extra interest accumulated over five months on a loan of Rs 50 lakh, on which the interest rate is 8.5 per cent and tenure is 20 years, could range from Rs 75,973 to Rs 1,76,514, depending on where the borrower stands in his loan tenure. Depending on the exact formula that the government adopts for its loan waiver scheme (which is yet to be revealed), the benefit will be a fraction of these number.

A committee headed by the former comptroller and auditor general (CAG) Rajiv Mehrishi is currently deliberating on the relief that can be offered to borrowers on the compound interest that has accumulated during the six-month loan moratorium that ended on August 31. Instead of putting the burden on banks or on depositors, the government may take the burden upon itself.

According to media reports, the quantum of waiver is likely to be restricted, and only select categories of borrowers—in all likelihood, the smaller ones—are likely to be eligible for it.

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Since the moratorium was announced late in March, most borrowers’ EMI for March had already been paid. So, most of them were actually able to avail of the moratorium for five months only.

What a borrower’s accumulated interest liability for these five months of moratorium will be depends on where he stood in his loan tenure at the time when the moratorium began (see second column of table). This happens because the principal outstanding is higher during the earlier part of the loan tenure, so interest also accumulates more rapidly.

If the government pays the compound interest (interest on interest), then borrowers would have to effectively pay only the simple interest cost for those five months and the balance cost would be borne by the government. “This will bring immense relief to borrowers who have been struggling with their cash-flows due to the pandemic and the lockdown,” says Adhil Shetty, chief executive officer, Bankbazaar.

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First Published: Fri, October 23 2020. 17:54 IST