The Cheat Sheet

Why did my bank credit my loan account with interest?

Radhika Merwin | Updated on November 11, 2020

Credit? You mean bank debited your loan account with the interest charged on the loan…

No no, I mean my loan account got credited with interest last week. Though it was only a few hundred rupees, it was a pleasant change (no pun intended)!

But why did banks credit money into loan accounts?

Well, let’s go back a little to understand the context a bit better. Remember, the six-month moratorium option that banks granted you on loan EMIs — where you had the option of postponing the payment of EMIs from March 1 to August 31? Well some borrowers who opted for it found that the relief had cost them dearly.

How so?

If you availed of the moratorium, then your bank would have continued to charge you interest on the outstanding loan amount during the moratorium period. What’s more, the EMI deferment would have resulted in the unpaid interest being added to the principal amount. So you would pay interest on interest (or compound interest).

Hence your burden goes up substantially if you took the moratorium option. Following the Supreme Court’s direction, the Centre rolled out a waiver of compound interest scheme, to lower the burden of borrowers. Essentially, borrowers are paid the difference between the compound and the simple interest for the six months (from March 1 to August 31).

Oh, a lot to cheer for those who took the moratorium. But what about those like me who decided to pay EMIs despite difficulties?

That’s the best part of the scheme. All borrowers, irrespective of whether they took the moratorium or not, are eligible.

All? You mean even I am entitled to the benefit?

Yes, as long as you satisfy certain conditions. One, the aggregate outstanding amount (as of February 29) in all your loan accounts should not exceed ₹2 crore across all lending institutions. So if you have multiple loans, like home loans, personal loans, etc., then the outstanding amount for all these loans will be clubbed together to see whether you fall within the ₹2-crore threshold.

Also, your loan account should have been standard, not an NPA (overdue for 90 days), as on February 29. Almost all loan categories (excluding agri loans) come under the scheme.

How much do I actually get?

Hold on! Before you count your chickens, you must understand how the benefit is computed. The difference between compound and simple interest is calculated on the loan outstanding as of February 29 — so repayments made during March 1 and August 31 will be ignored. The rate of interest (on the specific loan) prevailing on February 29 will be considered.

Since it’s just interest on interest it may not amount to much. For instance, if you have an outstanding loan amount of ₹50 lakh and you were paying 8 per cent interest, then the amount that will be credited to you will be about ₹3,300. If you have a car loan of ₹7 lakh at 11 per cent interest, then the benefit that accrues to you is about ₹890.

Hmmm…hardly a Diwali bonus, but a good Shagun nonetheless!

But remember you do not get any money in hand. The benefit is credited to the respective loan account, say home/personal loan or credit card. This will, in turn, reduce the outstanding amount on the loan.

Oh! So I must really not count my chickens…

Cheer up. It is still something. And even if you have not taken any loan but have a credit card, you get some benefit. Credit card dues outstanding as on February 29 are considered for the benefit. So you would have got a few hundred rupees benefit there too.

Interestingly, if you have done some purchases online through debit card and converted them into EMIs (available for select customers) you could expect some benefit there too, as the bank considers future EMIs as loan.

So, it pays to be indebted!

I wouldn’t go that far, but in this case it certainly is an unexpected windfall!

A weekly column that helps you ask the right questions

Published on November 11, 2020

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