The Money Show with Mr Raj Khosla | What are your Options after Moratorium?
Ms Mubina Kapasi of ET Now interviews MyMoneyMantra Founder & Managing Director, Mr Raj Khosla on THE MONEY SHOW to discuss the options borrowers still have after the expiry of six months of RBI’s EMI relief. Here are the excerpts.
Ms Kapasi: As Moratorium period has ended on Aug 31, and many of you may have already had to cuff up with September EMI or will eventually have to in the rest of three weeks of the month. But if you are still struggling with cash flow or facing disruption because of job loss or impacted business due to COVID 19 pandemic, we will discussing what are the options before you. Mind it, it is very important to ensure you do not default on your loan as it will bring bad credit rating.
Let’s welcome Mr Raj Khosla of MyMoneyMantra and start a candid conversation for borrowers.
Ms Kapasi: A lot of people will now have to prepare for resumption of loan repayment. Unfortunately many may not be able to do so, many businesses may still be facing problems, many people may still be not able to find jobs, or whatever the reasons be…what essentially are the options during this hot water situation to resume the EMI now, Sir?
Mr. Raj Khosla: Before we get on to what are the options available for retail loans I would like to emphasise once on one very important point. There has been a lot of discussion around this issue of ‘interest on interest’ which is pending with Supreme Court.
There is huge difference between monetary policy & fiscal policy. Monetary policy is where they release liquidity and make it easier for funds to be lent out. Fiscal policy is where they collect money either through taxes or issuing debt & then spend & create demand thereon. This issue of ‘interest on interest’ is something that will weigh heavily on everyone until the Supreme Court’s judgment comes out. Honestly it is up to the government to step in because you can’t penalise fixed deposit holders and take off their rate of interest, what they are going to earn and say that we are not paying you as we are going to give relief to individual borrowers.
So yes these are difficult times & some bank customers are bound to face problems with respect to repaying their loans now that the Moratorium period is over. First up, all those who has availed of Moratorium & their instalments are due, have the option of either paying the same EMI & extending the tenor of the loan or going back to bank and saying if the tenor is to be kept the same what the EMI will be. The customer who has cash flow issues & seeking restructuring, he has to prove that COVID19 has impacted his cash flow and as of 1 March 2020 his account was standard. It had not got under. Meeting these two criteria, each bank will announce their restructuring guidelines for retail loans, for Home Loan, Personal Loan or Credit Cards. Restructuring is possible for not more than 2 years.
I recommend restructuring option as a last resort. In first instance try to collect as much funds as possible from family or friends or through possibly sale of some assets. Stay current with your account. Do not opt for Restructuring without testing other options.
Next consider consolidating your debt. For example if say an account is bearing up to 30% of interest cost, try to move it quickly down to lower interest bearing debt. As a last resort, look at the offer by your bank and seek restructuring for the outstanding.
Lastly always be mindful of your credit score. If you apply for restructuring now & stick by terms of restructuring there will not be any impact on your score. Check with the credit bureau & bank and ensure that your score is not changed. If in case you are unable to meet the terms, the credit score will be impacted and so will be your ability to borrow in future.
Ms Kapasi: In restructuring would the interest burden be a little lower than it was on Moratorium. Will credit score affected due to restructuring?
Mr. Raj Khosla: If you restructure your loan and abide by terms of restructuring of loan, your credit score will ideally be not impacted but as I mentioned before you must make sure that it is not impacted. Sometimes due to wrong reporting or any other issue, the score may go down. So do make sure that your credit score is not impacted as a result of restructuring.
‘Interest on interest’ is actually such an issue, that it implies a very negative phrase as if someone is trying to twist your arm. However can you imagine if you have availed a fixed deposit at 6% and just because of some other customers who need EMI repayment relief, would you accept 2% or can share holders be suffered for this type of repayment relief.
It is something that government needs to shoulder. It will be unfair to expect lender to not charge ‘Interest on interest’ but then the matter is with Supreme Court to decide.
Ms Kapasi: How essentially Balance Transfer will help customers who need loan holiday?
Mr. Raj Khosla: A Transfer will be best advised in case your loan was running on MCLR & the difference could be 100-150 bps. Then you can seek Balance Transfer because you will have a lower rate of interest and that will come as some relief. But if you are already serving RRLR you will not get as much relief as there will be cost of transferring to another lender as well. Best advice if u are at such a tight corner, is to stay with your lender and seek the restructuring facility.
Ms Kapasi: In the last few months we have seen massive reduction in rates significantly but there must be cost involved.
Mr. Raj Khosla: A lot of lending is already linked to external benchmark. Not only repo rates, there are other benchmarks as well. For instance, Citi Bank links to treasury bills. Only few loans are still on MCLR. These rates are not falling as quickly as repo rate was falling that’s why it makes sense to transfer your loan to lower rate of interest. But if you are already at lower rate, there is not much to gain from transferring loan, especially today when it is so difficult for lender to assess your credit worthiness. The cost of transferring is an added disadvantage.
Ms Kapasi: Just to summarise Mr Khosla, if I have opted for EMI holiday. Of all the options we have discussed, if I am still finding it difficult to pay my EMI & short on cash, what should a borrower like me do?
Mr. Raj Khosla: Short on cash, try & sell some asset which you do not need badly and probably you may get a good price. If you are unable to do that, approach family & friends to raise some cash. As a last resort, contact bank & seek restructuring.
The bank is duty bound to extend the facility to you. A blanket Moratorium was not a solution. So a restructuring for those affected by pandemic is in the right direction and it is also your right. If your loan was standard on 1 March 2020, there is no way, you will not get that accommodation. That is your last resort.
Otherwise try to clear your debt as much as possible or move to low interest regime. If your outstanding are at rate of 30-36 % on Credit Card, you should manage your loan by using Gold Loan, or Used car loan. Lastly ensure that you cut your discretionary spends. Try to conserve cash as they say tomorrow is another day.
Ms Kapasi: Now let’s take questions and queries from our viewers.
FALAK MERCHANT: I had opted for moratorium for the full period i.e. mar to august. i got a message from bank which says EMI with interest outstanding for the full period for which the moratorium was availed. In case of your inability to make the payment, kindly contact your relationship manager.
Such a big payment will put pressure on me. What should i expect when i contact the relationship manager? Do I have any rights here or can i ask for more Moratorium?
Mr. Raj Khosla: Falak, there are lots of people on the same boat. First of all, take heart. Secondly, it is your right to avail of restructuring. You are within your rights to ask for restructuring. If your relationship manager has asked to pay a bullet payment and you are able to make that payment, off course make it. It will be in your best interest. It will have the least impact on your EMIs. Abide by bank rules.
When you are unable to make the payment, you are in your own rights to ask for restructuring it is your right. However you need to follow the terms in accordance of bank policies. Before that you are required to prove that pandemic has affected your cashflows and your account was current as of 1 March 2020.
They will give you terms, as per bank’s policies. Be aware of those.
RAVIKANT OJHA: I have been reading about how there may be waiver of interest on moratorium period. should i wait for the same before i take forward any communication with my bank on recasting my loan.
Mr. Raj Khosla: First up, it is going to be a long way. It should not stop you from opening up a dialogue with your bank. If there is any refund to be made pursuant to Supreme Court’s judgement, that will be made accordingly. So this should not be a reason to delay communication with the bank.
ARUN KARDAM: I have a loan outstanding of 50 lacs on my house. interest is MCLR basis. I toook moratorium during April and May as my business was shut. now MY BANK HAS SUGGESTED MAKING BULLET PAYMENT BY DECEMBER to cut interest down. My EMI currently is Rs. 38591 and bank told me for EMI to continue at same levels this bullet payment is necessary. Your recommendation please.
Mr. Raj Khosla: Yes, bullet payment should be done. There were only 2 months when you did not pay your EMI so just to keep things simple, pay out bullet payment and your loan will not be impacted. EMI liability will not be a sizeable with 2 months of deferment and thus you should make a bullet payment. It will be in your best interests. In case you can’t repay, you may ask for restructuring and there too, the tenor will not be much as you opted for only 2 months of Moratorium.
SREEDHARAN ARROKAVIL: My son has been paying back his home loan EMI, the interest being based on MCLR. Please advice whether he will stand to gain if he switches over to Repo based interest regime.
Mr. Raj Khosla: If the outstanding is a small amount, it is probably better to pay out it right now. When you shift your loan to another bank, chances are high that there will be breakage in that shifting. If only when the outstanding tenor is large then should you opt for switching of to Repo based regime. However for six months or 12 months, there is no need to make the shift as there is a cost involved as well.