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Personal Finance

Is There an “Ex Gratia” Amount of Money Paid to Your Account? Here’s Why.

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Are you surprised to see money in your bank account? Or that your loan account has a lower “outstanding” amount suddenly? This is where you’re going to have to thank the government because they’re just paying up for a “waiver of interest on interest”.

The story is long but:

  • Coronavirus (you know the drill)
  • Moratorium on payment of loans (Read our story: 3 months of no EMIs but why you should pay when you can)
  • But wait, it’s only like saying don’t pay me now, pay me later. Interest continues to add up to your principal.
  • Moratorium stretches to 6 months
  • Supreme court is asked after moratorium: Wait a second, we need to pay interest for this moratorium period?
  • Supreme court, being Supreme Court decides the nation wants to know, or something like that if it’s not copyrighted already
  • Tells the government, dude, can you waive interest
  • The government is like hello, see our tattered pants and are you out of your blooming mind? But they didn’t say that because Supreme Court would bust a blood vessel and then there would be no pants at all
  • They’re like look, we can’t go around waiving interest. The banks can’t either, they will go bankrupt, in what is ironical but that is too much of a digression.
  • But we thought about it a lot, said the government, so we’ll pay for the “interest on interest” part of the damage.
  • Read: No-interest-on-interest what’s it going to cost?
  • Which is where we are now.

The Government has officially announced the scheme. (Read the notification)

What is the Waiver of Compound Interest?

Well, when you have a loan of Rs. 100,000 and you have to pay 12% interest, then you have to pay Rs. 1,000 per month as interest. However, if you don’t pay this in the first month, then the “principal” expands to Rs. 101,000 in the second month. Which means you’ll pay 1% of that in Month 2, which is Rs. 1010. That’s ten rupees more. If you don’t pay that also, then the principal goes up to Rs. 102,010. After this there will be decimal points so we will stop. But you get the drift. You’re paying more and more and even more interest.

The Government has said that this Rs. 10 more that you’re having to pay because the interest costs added up, they’ll take that cost on their own head. Eventually you’ll pay for it with your taxes, but let’s assume some rich people’s taxes are paying for it, it’ll feel a little better.

No, No, Tell Me What This Scheme Is!

So, the idea is this. It’s in steps.

First, only people who have loans of less than Rs. 2 cr. will qualify. And then all individuals and Micro/Small enterprises only. You have to have a loan for education, housing, car/bike, consumer durables, personal loans, an MSME loan, or credit card dues. It’s like everything except housing loans in Mumbai where everything outside of a train bogie costs more than 2 cr.

Second,  these loans should have actually existed as of 29 Feb 2020. And they should have NOT been in default at that time. But the loans can be taken from any banking or non-banking company: loans from housing finance company, bank, NBFCs etc. will also qualify.

Third, these lenders have to do something they have never done before. They have to pay you ex-gratia,  which comes from ex , meaning “without having to” and gratia, which is “beg or grovel or surrender your children”. In simpler terms, lenders must pay you without your needing to apply, so you get the credit in your loan account directly. Before November 5. No, really. This means, by Thursday, two days from now.

Fourth, you get paid regardless of whether you took the moratorium or not. Paid on time? No problem we’ll pay you back anyhow. This is a step higher than farm loan waivers although what they are waiving off is like five grains of rice in a biryani. Which, btw, is a good thing to have with all the money you get.

Fifth, after they pay you, the lenders can then go claim the money from the government. They’ll get paid once the government does some checks, because even they don’t blindly trust these bankers.

Will They Pay Me Even If I Haven’t Paid Interest or Taken Moratorium?

Yes. Even if you paid back your credit card in full without paying interest, you will be paid. The logic is that you might have struggled to pay it during a moratorium to avoid interest, which is why they’re rewarding you, in a way.

Wait, How Much Are They Paying Me?

The difference between compound and simple interest will be paid to you.

Take a loan of Rs. 10,00,000 at 10%. For six months, a simple interest would be a payment of 5% or Rs. 50,000. If you hadn’t paid at all, under simple interest, you would owe Rs. 10,50,000. (A)

But, because of the cunning thing called compound interest, your loan would have gone all the way to Rs. 10,51,053.31. (B)

You have been charged Rs. 1053.31 extra (B minus A) because of compound interest. You’ll get this Rs. 1053.31 in your loan account.

This is what you will get as a refund. Even if you paid your EMI on time. Even if you didn’t care about the moratorium. Why? Simply because maybe you chose to eat less food in order to pay for this EMI because you were honest, and they want to say that look, maybe you can get that biryani now. But more seriously, it’s like saying let’s not penalize people who chose to pay when they could have taken the moratorium instead, and anyhow the amount isn’t huge.

For what period? Six months, between 1 March and 31 August 2020. If your loan gets repaid before that, you only consider the pro-rata part for the period after 1 March to when it closed.

At what principal? The amount will be the outstanding as of 29 Feb 2020. That’s the amount on which the calculation is based – even if you’ve paid some or all of it back.

What interest rate? Whatever rate was on your loan on 29 Feb 2020. Even if the interest rate has fallen after that. For credit card dues, it’s not the insane 45% or something – it’s the average rate on the “EMI” offered by the bank, which is typically much lower at 12% to 18%. Interestingly, even ‘zero cost emi’ loans will pay you back!

How Come Zero Interest EMI Qualifies?

The note says that in case no interest is being charged on EMIs, then you should assume the MCLR or the base rate of the lender to be the interest rate. (See how Zero-Cost EMIs work)

So if you had a zero-cost EMI, you will still get money back.

Where Does The Money Come?

If you have an “overdraft” account like SBI Maxgain (a housing loan plus overdraft account) then you’ll see a credit entry for this amount.

If you have a loan account with a bank or NBFC, you should see a credit in it by November 5. In fact, get in touch with them right now and ask for confirmation that it will be paid.

If your loan account is closed, then you should connect with the lender to ensure you get the money in a different bank account.

Am I Supposed to Pay Income Tax On This Amount?

Of course you are. Unless the government comes out with a notification that you are exempt. But since you’ll pay for it eventually anyhow, you might as well pay part of it now.

Who Should I Contact If I’m Not Paid?

Your bank or NBFC will have a grievance officer and a complaint area or such. That’s where. You can’t ask the RBI or the government just yet.

What Should I Do With The Money?

Donate it if you weren’t in distress. There are enough people who’ll need it, given the damage Covid has left behind.

 

 

 

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