Special Covid personal loans offered by government banks charge lower interest. Should we borrow? | Photo credit: PTI

The Reserve Bank of India (RBI), as part of the Covid-19 relief measures, has allowed banks to launch a special personal loan program with easy repayment terms. This was aimed at people facing high medical bills for the treatment of Covid-19.

These loans carry lower interest rates than other unsecured personal loans. The borrower is expected to commit in writing to the bank that the loan funds will be used for processing purposes only. As part of this program, banks request a positive Covid-19 report from borrowers who apply for loans for processing as of April 1, 2021. The terms of these loans vary from bank to bank.

The eligibility criteria set by the few public banks that launched the special personal loan programs in Wave 2 only allow a select group of existing depositors and borrowers to access the program.

State Bank of India (SBI) Kavach Personal Loan Program is available for workers or retirees with no processing fees, no collateral or foreclosure fees. The loan offer to those who already have an account at one of the SBI branches and need money to cover medical costs related to the covid-19 treatment of self and family members as of April 1. Customers can benefit from a minimum loan of Rs 25,000 and a maximum of Rs 5 lakh depending on their eligibility. The loan term is 5 years, which includes a three-month moratorium. For the 60 month loan, the amount must be repaid in 57 IME including interest charged during the moratorium

The interest rate charged on Kavach personal loans is maintained at 8.5% per annum. Usually the interest rates are higher for unsecured personal loans i.e. the sanctioned unsecured loans offered by SBI for a term of five years carry an interest rate between 9.6 % and 13.85%. Borrowers must also pay a processing fee of 1.5% of the loan amount (minimum Rs 1,000 and maximum Rs 15,000) plus goods and services tax.

All major public banks such as Punjab National Bank (PNB), Bank of Baroda (BOI) and Union Bank of India (UBI) have implemented similar loan products with easy repayment and rates of lower interest. However, a common theme was that the loan was only available to existing customers.

The interest rates range from 6.85% offered by Bank of India to 8.5% offered by SBI, PNB and UBI.

PNB’s Sahyog RIN COVID Personal Loan is available to all government or private sector employees who have their payroll accounts in the bank and are receiving regular income for at least the past 12 months. The loan amount will be six times the average of their salary drawn over the past six months and capped at Rs 3 lakh.

BOI, which also offered the Covid treatment loan only to existing customers with their salary account, caps the amount at Rs 5 lakh. The maximum loan term is three years.

Bank of Baroda went further and only offered the loan to its home loan borrowers who have paid at least three months of installments.

Most of these unsecured personal loans are offered at much lower rates than traditional personal loans offered otherwise. These are aimed at reducing the burden of the common man in the face of the pandemic and, as a result, interest rates are low.

However, according to experts, despite lower interest rates, only those in urgent need of funds should opt for them. In an emergency, it is better to deal with the same by tapping into the emergency fund. If there is no emergency fund, investments such as gold or stocks must be liquidated. Borrowing should be the last resort as it is important to be frugal and control spending in difficult times.


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