TO PAY OR TO DELAY
How RBI’s Covid-19 Circular on Loan Repayment Affects Borrowers
The worldwide prevalent coronavirus pandemic has severely affected the global economy, putting financial markets in deep trouble. Small companies are facing a cash crisis and even big business is losing out. The global economy was hit hard and India is no exception. The lockdown announced in view of containing the spread of the virus has shut down the businesses entirely and with no further relaxation announcements. Business owners are afraid of running out of money, which can result in the business being completely shut down.
Initiative by government to provide Financial help:
The Reserve Bank of India (RBI) has taken measures to counter the economic fallout of the pandemic. The key interest rate has been reduced sharply by 75 bps. Reverse repo rate too, was cut by 90 bps point to 4%. Higher reduction in the reverse repo rate is aimed at prompting banks to lend more.
On March 27th, RBI allowed all financial institutions to allow a three-month moratorium for all term loans falling due between March 1st, 2020 to May 31st, 2020 in light of the COVID-19 outbreak 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 and the subsequent lockdown.
In effect, Banks/ Financial institutions can allow all customers to defer pay their monthly EMIs for a 3-month period, and the non-repayment will not hurt their credit score ,i.e., his deferment will not result in negative impact on credit score for individuals or credit downgrade or default for corporates.
The Loan Moratorium entails a customer to choose not to pay the monthly installments. This is on term loans for the months March, April and May. Term loans are classified as – home loan, personal loan, car loan and loan against property. This facility is also applicable for credit card dues. But, this does not mean that EMIs are being waived off. The amount has to be paid once the moratorium is lifted. Interest will continue to accrue if a borrower opts to go for the moratorium, and they will have to pay this additional interest along with regular payments when their EMIs resume in June. The moratorium is not mandatory: borrowers can continue to make EMI payments.
If one opts for the moratorium, the interest amount of this period of 3 months will get added to one’s principal outstanding amount. In this case, any loan will become expensive as compared to the current payment schedule. Hence, industry experts say the moratorium should only be opted by borrowers who are having a problem with their monthly income and therefore finding it tough to service the loan. Moreover, borrowers with lower tenure and principal, will not face a huge burden from the moratorium. In this case, if a borrower opts for the moratorium, he/she will see their tenure increase by one or two months of the loan, with the EMI remaining the same.
This can be easily understood by the following:
Although customers get immediate relief, banks will recover the cost once the moratorium is over, resulting in higher EMIs or increasing the tenure if the person can’t afford higher EMIs. With the new repayment plan, lenders will have to contact their banks, which will indicate updated EMIs.
The only way to avoid this cost is to not stop paying EMIs. Borrowers are advised to take the moratorium only when absolutely necessary. Although it will provide them with temporary financial relief during COVID-19, they will ultimately pay additional interest at the end of the moratorium. If they are comfortable paying the EMIs as scheduled, it is definitely the cheaper and simpler option.