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EMI Moratorium: Should You Avail the Benefit?

CA Rachit Agarwal
CA Rachit Agarwal

Availing a loan used to be a hectic task some time back but advancement in living standards, easy credit facilities, easy EMI (equated monthly installment) options and luxury living has made it easy. However, it has also made a burden named EMI a part of our lives and a large number of people appear to be used to it by now.

Reserve Bank of India has announced certain regulatory measures to mitigate the burden of debt servicing brought about by disruptions on account of COVID-19 pandemic and to ensure the continuity of viable businesses. It was felt that there may be a temporary disruption in the Cash Flows, and in some cases, loss of income, for the businesses/ individuals and the present measures work to bring relief to those businesses/individuals. So to give relief to common man, the Reserve Bank of India (RBI) announced that all lending institutions, including banks and housing finance companies, will have to give their borrowers a three-month moratorium on loans. The moratorium was for payment of all installments falling due between March 1, 2020, and May 31, 2020. According to the RBI, the deferred installments under the moratorium will include the following payments:

  • principal and/or interest components; 
  • bullet repayments;
  • equated monthly installments (EMIs);
  • credit card dues.
  • ODs and CC interest payments

It should be kept in mind that this is a grace period and not a waiver. Though the specifics will vary across banks, borrowers are likely to be given three options by lenders.

Option I: The borrower can make a one-time payment in June of the interest that accrues in April and May.    

Option II: The interest is added to the outstanding loan which will increase the EMI for the remaining months.

Option III: The EMI is kept unchanged but the loan tenure is extended. The number of additional EMIs will depend on the age of the loan.

This is available to all such accounts, which are Standard Assets as of 1st March 2020. However, some banks are also giving such facility to defaulted customers depending upon his/her track record. To avail such benefit, the customer will have to contact his/her bank.

RBI has clarified that availing this scheme will not affect credit ratings of borrowers neither will turn their loans to NPAs nor attracting any penal interest or legal consequences. However, the bank will charge interest for the unpaid amount. Generally, any delay in payment leads to default and gets reported to Credit Bureaus. For business loans of Rs. 5 Crores and above, the Banks report the overdue position to RBI also through CRILC. As a result of this relief package, the overdue payments post 1st March 2020 will not be reported to Credit Bureaus/ CRILC for three months. Similarly, SEBI has allowed that Credit Rating Agencies (CRAs) may not consider the delay as default by listed companies if the same is owing to lockdown conditions arising due to COVID-19. 

In the case of Credit Card dues, there is a requirement to pay the minimum amount and if it is not paid the same gets reported to Credit Bureaus. Given the RBI Circular, the over dues in the Credit Card account do not get reported to the credit bureaus for a period of three months. However, interest will be charged by the Credit Card issuer on the unpaid amount. Although no penal interest will be charged during this period, but you must remember that the interest rate on Credit card dues are normally much higher compared to normal bank credit and you should take a decision accordingly.

Different banks have given the customers option to tell their choice of whether opting in or not in the scheme by SMS or E-Mail. So, it is important to check concerned bank guidelines and take steps as prescribed. Some banks have also given customers the freedom to change their option in the future. Even if the customer has paid the EMI of March, the customer can get a refund of the same by contacting bank concerned officials. If customers have availed a loan from more than one bank or multiple loans from a single bank, then they can also avail this facility bank-wise or loan wise.

The impact of this can be understood with the help of an example. Let us assume a borrower took a home loan of Rs 50 lakh at 9% for 20 years. The EMI comes to Rs 44,986. If he wants to skip the next two EMIs (April and May), here’s how the moratorium will impact his repayment schedule.

Remaining Tenure

Option I: Pay interest of two months

Option II: Increase the EMI

Option III: Extend the loan tenure by

      19 years

           73,534

The EMI will increase by Rs. 674 to Rs. 45,660.

          10 months

      15 years

           66,442

           6 months

      10 years

           53,131

           3 months

        5 years

           32,291

           1 month

Clearly, the longer the remaining tenure, the bigger is the impact. This is because the interest accounts for a larger portion of the EMI in the early years and progressively comes down. So, people with older loans taken 10-15 years ago will not feel the burden as much as someone with a new loan taken 2-3 years ago. Ironically, people with older loans may not really need the moratorium as much as those with younger loans.

You may take the benefits under this package if there is a disruption in your cash flows or there is a loss of income. However, you must take into account that the interest on the loans, though not mandatorily payable immediately and gets postponed by 3 months, continues to accrue on your account and results in higher cost. So, the decision on the same should be taken taking into consideration all the other financial parameters of the business or individual as applicable.

For any professional help, kindly visit the consultancy division of ProCapitas (link is given below) or mail us at [email protected]

https://procapitas.com/consultancy-services/

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