By Mr Rakesh Reddy, Director, Aparna Constructions & Estates
The government’s decision to waive the compound interest component on outstanding loans during the moratorium period from March to August 2020 is a positive outcome for both consumers and lending institutions. With the economy still recovering from the COVID-19 pandemic, borrowers were demanding an extension of the 6-month moratorium period. The government’s plan to bear the burden of the waiver will provide much-needed support to all stakeholders instead of being penalised for payment deferment. It is estimated to cost the government approximately Rs 6500 crore.
The compound interest waiver scheme will apply to all outstanding loans up to Rs. 2 crore for MSMEs, housing, education, automobiles, and credit card dues. Under the scheme, a borrower is required to pay simple interest instead of compound interest on the outstanding loan amount during the moratorium period which means a lower interest burden on the borrower. All banks, financial institutions, and housing finance companies will have to comply with the interest waiver guidelines.
The purpose of this waiver is to reduce the compound interest portion which was added to the outstanding loan amount during the moratorium. Therefore, borrowers will see their outstanding amount decrease after the compound interest waiver. The reduction in the outstanding amount will also lead to a revised repayment schedule, which will result in lower EMIs for the remaining tenure. This will reduce the repayment burden for those with home loans.
The waiver will be beneficial for small borrowers whose loan accounts were not classified as non-performing assets. While the interest waiver will be applicable to borrowers who availed the loan moratorium either fully or partially, those who continued making full payments will also benefit from the waiver in the form of credit to their respective loan account.
Those who have just started repaying their home loans will benefit more that those with older home loans. This is because the proportion of the interest component is high and the principal component is low at the beginning of the loan tenure. When the loan tenure nears completion, the interest component is low and principal component is higher. Therefore, those with high interest portions in their EMIs will benefit more from the compound interest waiver
The interest waiver is a positive move for those who had active home loans during the moratorium, but the timely transmission of these credits is imperative. The task of crediting the amount in the respective accounts of eligible borrowers by the lending institution must be implemented with immediate effect to bolster the sector.
The relief measures for the real estate sector are helpful, but they are not a long-term solution. Preserving liquidity for operations and relaxing delivery timelines will allow developers to focus on completion of projects without any additional burden. The interest waiver plan on home loans combined with repo rate cuts will boost consumer confidence. While some negative aspects of the economic downturn will be mitigated with these relief measures, more fundamental sector-wide changes must be seen. The real estate sector requires supportive measures, including Infrastructure Status and Single Window Clearance, that will improve upon the policy reforms. Over the long term, it is important to lay the foundation which will provide a strong impetus for growth.
Corporate Comm India (CCI Newswire)
