RBI EMI moratorium: To avail or not to avail?

Updated: Apr 06, 2020 2:12 PM

The RBI announcement has come as much-needed succour for borrowers who may face liquidity issues in the wake of the pan-India mandated lockdown amid the pandemic. But what does it entail?

RBI EMI moratorium, RBI moratorium on loans, rbi moratorium guidelines, home loan, personal loan, car loan, credit card dues, credit scoreWith this announcement, the central bank aims to resolve the concerns of loan borrowers with irregular cash flows whose income may have been impacted by the ongoing lockdown.

The mandated lockdown has led businesses across India to pause their operations, especially those that do not fall under essential services. Hence, while there is one group of professionals that is maintaining business continuity by leveraging work from home solutions, there is another group which includes blue-collar and white-collar workers who are currently dispossessed of a stable income source.

The RBI has recently instructed financial entities to grant a three-month moratorium to all borrowers on their equated monthly instalments (EMIs). The announcement has come as much-needed succour for borrowers who may face liquidity issues in the wake of the pan-India mandated lockdown amid the pandemic. But what does it entail? Let’s take a look.

A closer look

As per the RBI circular, banks and lending entities including NBFCs and MFIs can now permit their customers to defer their term loan instalments that are due for payment between March 1, 2020 and May 31, 2020. The types of loans covered under the moratorium include home loans, personal loans, car loans, working capital loans and agriculture loans. The central bank has also clarified that credit card dues are eligible for the moratorium. Further, it has instructed the financial institutions to ensure that the credit score of users is not impacted negatively.

The following are some of the key highlights of this announcement:

# All commercial banks are eligible to extend the moratorium. These include regional rural banks, small finance banks, and local area banks, co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions).

# Individual banks are required to frame policies that favour customers. Individual banks can choose to offer relief to all customers or the select few who have requested for it.

# The deferment of the payment during the moratorium period will not impact the borrower’s credit score.

# The moratorium enables the suspension of both the principal payment and interest for the stipulated period between March 1 and May 31.

# Types of loans covered: term loans including agriculture term loans and crop loans; besides retail loans including home loans, personal loans, education loans, automobile loans, and any loan that has a fixed tenure.

# Loans on durable items such as EMIs on mobiles, fridge, TV, etc. are also covered under the moratorium.

# The non-payment is also applicable for credit card dues.

Apart from this, the central bank has instructed the financial institutions to provide the same relief measures for all working capital loans availed by businesses.

Aspects on which clarity is awaited

While the central bank’s statement suggests that the tenor will be shifted, it is not yet certain how the deferred payments will be scheduled. So, this development may cause the loan to end three months after the original tenure.

Further, it is not yet clear whether the borrowers will pay the additional interest – accrued during the moratorium period – at once or it will be adjusted under some other arrangement. Then there is some doubt whether the guidelines cover loans taken on a credit card. Some speculate that since credit card dues are eligible for the moratorium, such loans must also be covered. However, official clarity is awaited.

Also, RBI has said that individual banks have the prerogative of formulating relief policies for their users. Hence, the onus is on a lender to come up with reasonable eligibility criteria to determine who can avail of this facility.

Here’s what one can do

The central bank has explained that the moratorium will only result in the shifting of the repayment schedule by three months. It will, therefore, not be akin to a concession or a waiver. Since the terms and conditions of the loan will stay intact, interest will continue to be accumulated during the moratorium period. Consequently, borrowers who will avail of this facility will have to pay added interest accrued during the three months after the moratorium expires.

With this announcement, the central bank aims to resolve the concerns of loan borrowers with irregular cash flows whose income may have been impacted by the ongoing lockdown.

Those with regular salaries should, however, carry on with their repayment schedule. Here’s why:

They will still have to pay the interest generated during these months and that would be an unnecessary expense as your savings account will give much lower interest than what you would be paying on the loan. For borrowers who took loans via credit cards, this can mean taking on a heavy burden as interest rates on credit cards are typically very high.

The COVID-19 crisis has led the Indians to assume the wisdom of abstinence as the most effective tool to overcome the pandemic. Not only has it become every Indian’s prerogative to abstain from leaving their homes – unless absolutely necessary– but also to spend their resources as economically as possible. The same wisdom is best applied to resolving the confusion that has arisen among the borrowers in light of the central bank’s recent circular – should one apply for the moratorium or not? The answer is: abstain unless it is absolutely essential.

(By Saurabh Garg, Co-founder and CBO, NoBroker.com)

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