By Rishi Anand
The Covid-19 pandemic has had a devastating impact on the economy. The closure of businesses for nearly two months and continued restrictions have severely affected household incomes. The Reserve Bank of India stepped in to mitigate the financial distress of individuals and businesses by allowing a six-month moratorium on the monthly instalment of term loans and credit card dues. Originally, the central bank had allowed a three-month moratorium but extended the facility by another three months from June – August.
The pause in the payment of monthly instalments has given several borrowers breathing space amid tight liquidity conditions. However, the moratorium allowed by the RBI is a temporary deferment in repayments and not a waiver. The EMIs will be deferred for six months, but interest will continue to accrue on the outstanding amount. The interest for six months will be added to the outstanding amount, which will lead either to an increase in the monthly instalment or the tenure of the loan.
Opting for the moratorium will be disproportionately negative for people with long term loans like home loans. Moreover, if substantial loan tenure is left, the interest will compound and increase the overall cost of the loan considerably. Availing the moratorium will, however, have no impact on the credit profile of the borrower.
At the other end of the spectrum, the extension of the moratorium is expected to be credit negative for financial intermediaries like Non-Banking Financial Companies and Housing Finance Companies. The deferment of monthly instalments is likely to have a severe impact on the cash flows of these financial institutions. Even though the RBI and government have announced a slew of measures to allay liquidity concerns of financial institutions, these measures may only partially set-off the will have minimal impact in the short to medium term.
Many NBFCs have been beneficiaries of the moratorium facility as banks have allowed them to defer payments on outstanding loans. Banks are a major source of funds for financial intermediaries. The extension of moratorium has hit certain top-rated NBFCs and HFCs hard. On one side they are facing dwindling cash flow, on the other, mutual funds, a key source of capital, are hesitant to roll over commercial papers or subscribe to debentures due to redemption pressures.
The extension of the moratorium could prove advantageous for borrowers who were facing an acute liquidity crunch. The postponement of EMIs will help them focus on the essentials. Similarly, financial intermediaries who have borrowed from banks will have more operational headroom. But one should avail the moratorium only if he/she is facing a liquidity crunch as it will increase the total cost of the loan.
(The author is CBO of Aadhar Housing Finance)