Just because Covid-19 personal loans are available at reduced rates does not mean that one should opt for it.
By Dinesh Thakkar
We are living in unprecedented times where curfews might have been witnessed by many people but the closure of business for more than 50 days is something everyone must be witnessing for the first time in their lives. Everyone is affected by the nationwide lockdown—employees or employers. It is a tough time for everybody as borrowers who have active loans for which they are servicing EMI regularly are facing temporary cash crunches. The pain is deeper for non-salaried people who don’t have regular income. Even the salaried class are facing pay cuts and unemployment. Banks and NBFCs are offering Covid-19 personal loans, but let us try to understand whether these are available to everybody and whethe they can be taken for business purposes.
Covid-19 personal loans
Covid-19 personal loans, as the name suggests, are not business loans but personal loans with some relaxed norms. The biggest relaxation is in the form of a lower rate of interest. Rate of interest is between 7% to 10%, which is lower than normal rate of interest for personal loans which start from 12% and can go up to 20%, depending on the individual’s credit score and income related factors. Banks which are offering such loans are Bank of Maharashtra, Punjab National Bank (PNB), Indian Overseas Bank (IOB), Bank of Baroda (BoB), Indian Bank, Union Bank of India, UCO Bank, State Bank of India (SBI) and Bank of India. Rest of the banks are only providing moratorium of up to three months on personal loan EMI payments that are due between March 1, 2020 to May 31, 2020 as per RBI directive.
So the big question is whether it is available for everybody. The answer is no. These loans are for existing customers of lenders and most of the banks are offering loans to borrowers of home loans. The eligibility criteria is that the borrower needs to have salaried account or personal account with the bank.
Repayment track record
The idea is that banks are ready to lend but not at the cost of default. They will lend only to those borrowers who have a decent repayment track record and a good credit score. Different banks have different criteria for how much can one borrow. For the self-employed, the limit is usually 50% to 60% of their last filed income. For salaried personnel, it is about 10 times the monthly salary.
Banks have already given a lifeline to existing borrowers at the behest of RBI by offering a three-month EMI moratorium on all outstanding loans falling due between March 1, 2020 to May 31, 2020 including home, educational, personal and car loans. The catch is the interest will still accrue during the moratorium and will be added to the outstanding loan amount. We need to understand that it is not an interest waiver but only deferment. So in a way, the total interest cost of the loan will increase.
Just because Covid-19 personal loans are available at reduced rates does not mean that one should opt for it. Loans still have to be repaid and we don’t know what will happen in the future. We don’t know how long this crisis will continue and we are borrowing right now to fill the gap for something when we don’t know whether we will be able to repay or not. Yes, if the requirement is there, then one should take these loans but only as a last resort. No point adding more debt in uncertain times.
The writer is chairman & managing director, Tradebulls Securities