RBI’s Covid 19 Relief Policy Review: Should You Opt for Moratorium on Loan(s) EMIs & Credit Card Bills?

RBI’s Covid 19 Relief Policy Review: Should You Opt for Moratorium on Loan(s) EMIs & Credit Card Bills?

Covid-19 pandemic is an economic tsunami that has turned even the largest of the world’s economies into a standby mode. Reeling under the pressure of pandemic outbreak, India is observing a complete lockdown since March 23, 2020, shutting its all non-essential activities, i.e., commercial activities of all sorts, except for food, medicine & other identified essential services like police & public health care, etc. The businesses, the schools, and the universities, everything is on a standstill.

On March 27, 2020, RBI Governor ShashiKanta Das acknowledged the financial stress and economic disruptions caused due to COVID19 crisis. Primarily RBI made two historic statements:

1) Steep cut of 75 bps on benchmark lending rates (which will eventually make new borrowings affordable)

2), and three months’ EMI moratorium on Term Loans, Crop Loans,  working capital credit lines, and Credit Card bills repayment.

The news hit the chord with the distressed customers, and people started to cheer a loan holiday of three months finally. However, by the end of the day, the clouds were clear, and it was evident that the RBI governor has only acknowledged the issues of “financial distress.” The right to ease out the financial crunch lies solely in the hands of the respective bank.

He spoke about moratorium and deferment, and not the waiver.

Whether you have a running EMI, a pending Credit Card bill, or both, MyMoneyMantra has put across some interesting points to help you decode the real impact of the moratorium on your pocket. We have reviewed the RBI statement and also compiled a list of FAQs for new and old borrowers.

Excerpts from RBI Governor’s speech:

“In respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks, and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) (“lending institutions”) are permitted to grant a moratorium of three months on payment of all instalments1 falling due between March 1, 2020, and May 31, 2020.

Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, maybe shifted across the board by three months.

In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are being permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. The accumulated interest for the period will be paid after the expiry of the deferment period.”

Four takeaways from RBI for lending customers:

1.  RBI has granted its approval for a loan EMI moratorium up till May 31, 2020. The respective bank will set the final modalities.

2. RBI allows deferment & not waiver of interest payment in this period.

3. The tenor of repayment will be extended accordingly.

4. The moratorium is not applied to the interest component. A customer is bound to repay interest component accrued during the EMI holiday period, later on.

So, what is good, bad or ugly in the announcements made by RBI’ for COVID hit middle class, small businesses, and salaried individuals?

Let’s figure out if it is apt to opt for a Loan EMI holiday or not?

The good:

  • You can put the bank payments on hold for all of your term loans, including Home Loans, Personal Loans, Education Loan, Working Capital Credit Lines, and Credit Card bills till 31st May 2020.
  • The RBI has clearly reiterated that the nonpayment of EMI or failed standing instruction on EMI or Credit Card payment will not hurt your credit score. Indeed the activity in this period will not make any footprint on your credit report.
  • So, the customers can leave aside worries of paying back their Home Loan, Car Loan or Credit Card Bills and focus on meeting essential needs during this difficult time of COVID19 Lockdown.

The Bad:

  • The EMI & Credit Card bill are deferred & not waived off. The nonpayment of your outstanding loan and credit lines during this period will increase the loan tenure and the overall liability.
  • RBI has not ordered lenders to pass on EMI break to all customers. It is only approval for granting the same in case the bank deems it fit for its customers hit by COVID 19. The banks are directed to set a board to define the guidelines for customers opting for EMI holiday, and thus the final conditions for serving three months moratorium can vary as per the institution.
  • The EMI Moratorium relief is not offered to all customers. As per the RBI press meet, you are required to apply to your bank for EMI break and share the proof of the impact of COVID 19 on your earnings to avail of the repayment deferment.

The Ugly:

If you opt for the moratorium of three months, the interest will begin to accumulate & increase your overall financial bearing. This can indeed hurt your monthly budget if you do not have a backup income source.

BOTTOM LINE

The moratorium or EMI holiday is for the principal component and not on the interest charges. So, if you have Rs 50000 to repay each month and you apply for a moratorium till 31st May 2020 from your bank and Credit Card Company.

In June, your EMI burden will be Rs 50000 + the interest accrued. Depending on your loan schedule, this interest burden may vary. Let’s say you build up the interest of Rs. 5000 in three months. Will you be ready to repay 55000 in place of 50000 after two months?

MyMoneyMantra recommends customers to carry on with their repayment schedules and avoid mounting up their repayment burden.

Conduct a cost-benefit analysis and carefully weigh in the liquidity of funds in your hand. Opt for EMI holiday only in case of an extreme cash crunch.

Let your standing instructions flow as usual and avail of moratorium if and only if you are financially-stressed.

FAQs

April 1 is fast approaching, and it is important to get answers to your questions.

RBI has left the power to frame modalities for three months EMI moratorium on Banks, and till date, there is no official statement from banks except SBI. However, many banks such as IDFC First, Union Bank of India, Kotak Mahindra Bank have started to acknowledge social media shout outs by customers on Twitter for EMI Moratorium.

Let’s discuss find out answers to all of your questions on RBI’s decision to grant Term Loan, Working Capital Credit Line, and Credit Card moratorium and deferment:

✅ Will my EMI due on 2nd March be delayed till June 2020?

Ans: As per RBI guidelines, the banks are allowed to extend a moratorium to the interested customers. You would need to request your bank for the EMI break. It is likely that the EMI will be cleared automatically as per the standing instruction in the System. SBI has just updated that all customers are provided with the moratorium, and those who want to pay should inform the bank and make the payment.

✅ How would I know about the bank’s board-approved policies for EMI relief to the borrowers?

Ans: You should get in touch with your relationship manager or contact customer care via email or phone call. Many banks like SBI, Kotak Mahindra, Union Bank of India, IDFC First, and IDBI have already started to accept customer requests for payment deferment.

✅ What does it mean when RBI and banks say all EMIs on term loans stand canceled?

Ans: The statement implies that all term loan customers are eligible for requesting EMI Moratorium. The final communication depends on the customer’s willingness to opt for the EMI deferment.

✅ Will the non-payment of my EMI and Card Bill hurt my credit score?

Ans: As RBI Governor explained, if your request for EMI delay is accepted by the bank, the non-payment will neither be marked in your credit history nor will it impact your credit score.

✅ Which banks & NBFCs are offering EMI deferment?

Ans: All lenders registered under RBI, such as commercial banks (including 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) are eligible to extend the moratorium.

✅ The April & May EMIs will be paid as per a new repayment schedule, or I will be asked for bullet payment?

Ans: Your bank will share the details for the same.

✅ What is the difference between waiver and deferment?

Ans:The waiver is removing the payment while the deferment is delay in payment. RBI has recommended a delay of repayment schedule and tenor across the board by 3 months.

✅ What types of loans are eligible for moratorium cover?

Ans: All term loans like Personal Loan, Car Loans, Home Loan, Education Loan, Credit Card outstanding, Retail Loans (like Consumer Durable Loans, EMIs on mobiles, fridge, TV), Agriculture Term Loans and Crop Loans are open for option of three months moratorium.

✅ Did RBI announce moratorium for Credit Card payments?

Ans: Yes, RBI later clarified that the moratorium is open for Credit Card payments as well.

✅ Are Business Loans included? What was RBI’s announcement for businesses?

Ans: RBI did not specifically mention Business Loans but retail loans.

It is unlikely if your bank will extend the moratorium on your Business Loan. However, if you need one, you should contact your lender, and you may even get success. Banks have also introduced special Covid 19 Loan at Concessional flat rate for MSMEs to bridge the financial issues mushroomed because of pandemic spread.

Also, RBI has granted permission to banks to allow deferment for interest payments for all Working Capital Loans. Moratorium or deferment availed by a business will not result in asset classification downgrade.

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