By Rishi Anand
The sudden outbreak of global Pandemic COVID-19 has wreaked havoc on the global economy. In order to contain the spread of this disease, the Indian government had announced a 21-day nationwide lockdown which has now been extended till May 3, 2020. Due to this the economic activity has come to a near halt with borrowers likely to face a liquidity crunch. In order to ease the crisis for borrowers, the Reserve Bank of India (RBI) allowed lenders to provide a three-month moratorium on term loans.
The RBI permitted banks and NBFC’s to offer a moratorium on all repayments falling due between March 1st 2020 and May 31st 2020. The important term in the announcement is ‘moratorium’ which means it is just a deferment on repayments. It is not a waiver and lenders will continue to charge the interest on the due amount. However, opting for the moratorium will not have any impact on the credit profile of the borrower.
With days passing by post the central bank’s moratorium announcement, regular updates have trickled in giving clarity on way forward. Several lenders have already announced that the interest charged during the period will be capitalized, essentially increasing the interest burden over the period of the loan tenor. This capitalization will result in an increase of EMI payable along with an increase in tenor by 3 months due to moratorium.
The bigger question in the minds of borrowers is the eligibility for the scheme. What is being followed by most of the lending institutions is to offer the moratorium to customers who have opted for it while those who have not opted, for them EMI will be banked regularly.
There are various options given by all lenders for the borrower to register for the moratorium request through company website, company call centre and messages.
As the operational guidelines take final shape, a consensus is emerging among lenders on providing the following options to borrowers.
An option will be to pay the accrued interest as soon as the moratorium ends and continue with the regular EMI. If the option is not acceptable, the borrower can ask the lender to add the interest to the outstanding amount and increase the tenure of the loan. The tenor of the loan will get extended by the same number of months as the moratorium is availed for.
For example, if one has availed 3 months moratorium he gets a break of 3 months to pay EMI. Once 3 months are over the borrower will start paying the balance EMI’s. The interest that would have accrued during the moratorium period will also lead to an increase of EMI amount payable. So, as a result, the EMI will go up and the borrower will still have to pay the same number of EMI’s.
As explained above moratorium is just deferment of repayment and not a waiver. Interest will be accrued and capitalized resulting in an increase of EMI with balance tenor remaining the same. Resultant the borrower will have to shell out more. Hence if one is not facing any liquidity challenge it is suggested to continue with the EMI repayment and not opt for the moratorium. A moratorium should be sought only in extreme cases.
(The author is CBO of Aadhar Housing Finance)