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The Covid-19 pandemic is a watershed event in modern history and one which resulted in a massive upheaval in the economic health of countries around the world. The effect of this was felt on a collective and individual level with businesses shutting down or having to lay off, furlough, or cut the salaries of employees. Millions of people were affected with even white-color workers finding it difficult to meet daily expenses, let alone pay the Equated Monthly Instalments (EMIs) on their loans or dues on their credit card bills. 

Background of the loan moratorium 

It was in this context that the Reserve Bank of India (RBI) stepped in with several measures to provide relief to people across different demographics. One such step was providing the option of moratoriums on all retail loans from 1 March 2020 to 30 August 2020. During this moratorium period, however, interest would continue to accrue on the missed instalments, resulting in a larger outstanding loan amount at the end of the moratorium, which would have to be settled by paying the EMIs in a longer repayment tenure.  

However, this was later challenged in the Supreme Court, resulting in the government agreeing to waive off the interest on interest on loans that had accumulated during the moratorium period. However, keep in mind that this waiver is for loans of up to Rs.2 crore only. 

Cashback or ex-Gratia Payments 

The government had announced that those who did not avail of the moratorium and continued to be regular in their EMI payments during that time period were eligible for a cashback or ex-gratia payment. Again, this cashback or ex-gratia is only available to those individuals or businesses who have taken a loan not exceeding Rs.2 lakh and who have been regular with their EMI payments. Those who did avail the moratorium would get compensation for the compound interest that they were charged by their banks. 

The rule of the law 

The new mandate should be complied by all lenders who are regulated by the RBI. This includes major banks, cooperative banks, as well as microfinance institutions. The government has said that it would bear the difference between the simple interest and compound interest that was accrued on loans during the moratorium period of six months. 

The affidavit by the RBI states the following, “All Primary (Urban) Cooperative Banks/State Cooperative Banks/District Central Cooperative Banks, All India Financial Institutions and All Non-Banking Financial Companies (including Housing Finance Companies) to be guided by the provisions of the scheme and take necessary actions within the stipulated timeline therein”. 

What to expect 

If you have paid your EMIs on time, your bank or financial institution should pay you the amount that is equivalent to the difference between the simple interest that you paid and the notional compound interest on the outstanding loan amount as of February 2020, i.e., the notional interest on the interest that you paid. 

Your bank is supposed to credit this amount directly into your bank account. Lenders will claim this amount from the government later.  

Eligibility Criteria for Cashback 

How can you be sure that you are eligible for this cashback? You will be eligible for it if the following conditions have been met: 

The personal loan should have been taken from a lender that is recognised by the RBI 

As of 29 February 2020, you should not have had any default on the interest or principal component of the loan for more than 3 months prior 

How much cashback to expect 

The cashback calculation is done by subtracting the amount of compound interest from the amount of simple interest for the period of March to August. 

How to apply for the cashback? 

You don’t have to do anything to get the cashback or submit any application for it. If you are eligible for the cashback, it would be credited to your bank account automatically. However, if you had transferred your loan to another bank after 30 August, you will have to approach your previous lender in order to get the cash-back or ex-gratia credited into your account.  

If you have been diligent in paying off your loans before the pandemic hit, and have continued to pay off your loans even in the midst of the financial challenges, the cashback announced by the government will be good news for you. Apart from also ensuring that your credit score stays on track and is not compromised, paying EMIs on time always has been beneficial. The cashback will be more of an incentive to encourage people to continue to be regular on their EMI payments. While it is also applicable to those who had taken the moratorium, it would come as a financial relief for many. 

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