This moratorium period could be the much-needed vitamin that could boost your financial immunity during this difficult situation.
Extraordinary problems demand unprecedented solutions. Perhaps that’s what best defines the recent proactive measures taken by the government and the Reserve of Bank of India to arrest the spread of the deadly Covid-19 virus and minimise its economic fallout. From enforcing a 21-day nationwide lockdown to announcing a slew of welfare measures under the Rs. 1.7 lakh crore Gareeb Kalyan package, the government has already made it clear it will do whatever it takes to protect India’s economy and safeguard the financial interests of its citizens currently battling the Coronavirus threat. Naturally, expectations were high from the central bank to follow suit. And the RBI exceeded those expectations when Governor Shaktikanta Das apprised the country about the various pathbreaking decisions taken by the Monetary Policy Committee earlier today.
To ensure ample liquidity in the financial system, the RBI decided to cut the repo rate by 75 basis points to 4.4% while also announcing a host of other measures to infuse liquidity in the banking sector. However, the most significant step was to permit all banks, NBFCs and FIs, including HFCs, to allow a 3-month moratorium on payments of term loan installments outstanding as on March 1, 2020, deferment on which will neither impact the credit history of the borrower nor the books of the lender. Now, this step, in particular, will come as a major relief to borrowers of home loans, car loans, personal loans, etc. who were getting stressed over how they will repay their loan EMIs in these times of uncertainties and challenges.
Getting clarity is of utmost importance
The EMI deferment by 3 months is a rare announcement. However, borrowers would be well-advised to wait and watch how their lender will implement the central bank’s directive and not to assume anything based on hearsay. They should also not try to change any auto-debit standing instruction from their side because lenders are likely to defer automatic EMI payments by 3 months during the moratorium period as the loan tenure will get extended. Also, this EMI holiday should be seen as a deferment to better tackle the economic fallouts arising out of the pandemic situation and not a waiver of loan repayments. Most importantly, interest will continue to accrue on the outstanding portion of the term loans during the moratorium. So, getting clarity over your loan EMI payments would be extremely crucial.
Now let’s try to explore how two types of borrowers – those who are struggling with their EMIs and others who can still afford to repay – should go about managing their finances if their lender agrees to implement the 3-month EMI holiday.
Things borrowers who are struggling with their EMIs should keep in mind
The proposed moratorium could be a lifeline for you to meet the pressing financial requirements during this difficult time which might even lead to loss of income in some cases. You will not have to pay any term loan EMI for 3 months and doing so will not attract usual penalty charges and won’t impact your credit score. However, once the moratorium period ends, you’ll have to restart paying the EMIs with the interest charges.
The moratorium doesn’t alter the fact that repayment of loans is a legal and moral obligation. So, steps must be taken to ensure funds are in place to repay the EMIs once the moratorium gets over. Not doing so could lead to additional interest, late payment penalties and even loan defaults or settlements which could cause irreparable damage to your credit score or lead to loss of precious collateral if you’re servicing a collateralized loan such as a home loan or a car loan. You, as a borrower, can avoid these adverse outcomes by implementing strict cost-cutting measures – which should be slightly easier during the Coronavirus lockdown as many expenses like daily commutes, eating out, shopping, etc. will not be there temporarily. Additionally, you should ensure the money you save in EMI payments during the moratorium period is not squandered away on frivolous expenses.
If you’re still unable to raise requisite funds to repay the loan EMIs after the moratorium period, you could dive into your emergency fund, liquidate certain investments or even seek financial assistance from friends and family members until your finances are back on track. If you’re an Employees’ Provident Fund subscriber, you can also consider taking a non-refundable advance from your PF corpus to repay your loans after the government’s announcement on Thursday. Needless to say, each of these options to raise funds have some fallouts, like the liquidation of investments can lead to capital loss and disrupt your financial goals, taking a loan from family members could spoil long-standing relations if they’re not repaid, withdrawing from PF fund will deplete retirement savings, so on and so forth. So, think it through before taking such a measure and ensure corrective steps are taken quickly, like replenishing your emergency fund.
Things borrowers who can afford to repay their loan EMIs should keep in mind
If you’re servicing a loan and the ongoing Coronavirus pandemic hasn’t impacted your steady flow of income, you also need to manage your finances smartly during the 3-month moratorium period. Make good use of the additional savings during the lockdown, control wasteful discretionary spends, and set aside the required funds to repay your loan EMIs. In fact, this is a great opportunity for you to take steps to consolidate your finances, like increasing your emergency fund, purchasing a comprehensive health insurance plan for your family if you haven’t already, and clearing other debts. You may also get this EMI holiday for your credit card bills. However, I would strongly recommend you clear your credit card dues in full on time to avoid paying hefty interest charges and falling into a debt trap in the future. This would also ensure you maintain a great credit score which would work in your favour if you were to apply for, say, a repo-rate linked loan in the near future which are likely to offer record-low rates after the RBI’s latest rate-cut decision.
Again, make sure the saved EMI funds during the moratorium period are not wasted to fulfill unimportant requirements. The RBI governor also mentioned deferment of EMI payments during the moratorium will not have any adverse impact on the borrowers’ credit score. You’ll be, thus, well-advised to monitor to credit score regularly just to ensure everything is fine.
All of us are taking extra caution these days to prevent getting infected by the deadly Covid-19 virus. Similarly, you also need to take good care of your financial health and exercise caution and restraint. This moratorium period could be the much-needed vitamin that could boost your financial immunity during this difficult situation.
(The author is CEO, BankBazaar.com)