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EMI Moratorium, Not A Waiver

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RBI’s loan repayment relief only postpones our EMIs and does not pardon them

Source: Tavaga Research

The financial disruption caused by the COVID-19 preventive lockdown has put stress on various businesses and their employees. With this in mind, the Reserve Bank of India (RBI) has allowed lenders such as banks, NFBCs, and housing finance companies to put a six-month moratorium on repayments of term loans and credit card dues. 

In a supportive move toward providing relief to the borrowers, the Supreme Court (SC) on 3rd September 2020 directed the banks to not declare any account as a non-performing asset (NPA) for a period of two months. The SC is also weighing the petitions seeking a waiver of interest incurred during the loan moratorium period. The SC questioned the RBI and the Centre about the merit of charging interest on interest while the pandemic still remains at large. The moratorium period has been further extended to 28th September 2020 which marks the seventh month of the ongoing interim order.

A term loan is a loan that is repaid over a predetermined period of time, often with EMIs (equated monthly installments). Term loans include home loans, car loans, and personal loans. 

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RBI’s latest EMI moratorium

With RBI’s latest announcement and the Supreme Court’s latest order, a retail borrower may get their EMIs postponed for a period of seven months — March to September. Similar to credit card dues, which may be deferred for seven months.

But wait, the moratorium is not a waiver

A moratorium simply means an authorized or legally sanctioned period of delay or waiting. In this case, it is for the payment of money on loans and credit card dues. It is not a waiver, which means if we avail of the seven-month breather, we would still have to pay up the due amount after the moratorium is over. 

The seven-month worth of dues will not vanish from our list of liabilities. The accumulated amount has to be paid after the next seven months, including the interest that will keep being added to our principal. 

Do we pay up or wait out?

Those of us who have the ability to pay the installments, should continue with them rather than defer. It would prevent our personal debt from piling up. 

But in these unprecedented challenging times, those of us who are struggling to make ends meet or have income that is held up, the moratorium could signal some relief. 

Whether to pay EMI or defer it
Source: Tavaga

Of course, once the seven months are up, we would have to hit the ground running by paying the dues, including the piled up interest, if we don’t want our credit scores to plummet. That would require getting quite a few ducks in a row.

What will happen if we choose the EMI moratorium

If we don’t pay our EMIs during the moratorium, there would be an increase in the interest we have to pay. There won’t be any charges but the interest or EMI amount we pay for the rest of our tenure will go up.

For example, if we are paying EMIs at 11 percent interest on an outstanding loan amount of Rs 50 lakh for the next 15 years, we would be looking at 180 more EMIs with the EMI value as Rs 56,830.

If we do not pay during the three out of seven months, then the outstanding loan balance will increase and so will the monthly EMIs. In our example, the monthly EMI will increase to Rs 58,393.

So, in this case, a three-month non-payment will cost us Rs 1,563 more, for each of the next 180 EMI payments. 

Here is the table illustrating it:-

Interest burden due to deferment

Source: Tavaga Research

How to get the EMI moratorium

As is wont, RBI’s announcement is a nudge for lenders to act, with the final decision to roll it out resting with the latter.

With this relief package, most banks have employed an automated or automatic opt-in feature, which is usually being conveyed through an email or SMS. Some have made it a matter of a simple click on these communications to activate the moratorium, while others are automatically assuming that their customers are opting in for it, ie. not paying EMIs for the next seven months. 

The onus is on us if we choose to pay our EMIs to contact our banks and opt-out of the EMI moratorium.

Let’s take a look at the status of major banks and how they have implemented the moratorium –

SBI –

This public sector bank will offer automatic deferment of loan EMIs, meaning the customer need not actively apply for the moratorium.

However, those who have given standing instruction to SBI to debit the EMI every month will have to mail the bank instructing not to debit the EMI during these seven months, this can be done either by visiting the local branch or by email from the registered email address.

ICICI Bank

As per the bank’s website, a customer can choose either to “opt-in” or “opt-out” from the moratorium. For those choosing the opt-in feature, the accrued interest will be added to the principal amount and hence would increase the loan tenure, in cases where extension of loan tenure is not possible the EMI will be increased.

HDFC bank 

As per the bank those customers who have an overdue balance before 1st march 2020 are eligible for the moratorium. The customer can opt-in for the feature by calling the bank or by submitting the request at the bank’s website. For those opting for the moratorium, their loan tenure will be increased.

Does the moratorium affect our credit rating?

RBI specifically mentioned opting for the moratorium would not affect the borrower’s credit score. 

In its FAQs (frequently asked questions) for the announcement, RBI has clarified that the rescheduling of payments, including interest, will not qualify as default. It has, in fact, issued guidelines to the credit information companies to disregard the delay in payments in this duration, as reported by lenders, and ensure it does not affect the credit ratings of the beneficiaries. 

While it sounds like relief in these trying times, we should remember that the burden of payment is not going away. It will revisit us once the seven months are up. If we can be stingy with other expenses and continue paying our EMIs, that would be the ideal choice.

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