What Borrowers should consider before deferring their EMIs?

The COVID-19 Relief Package announced by the Government last week of March is a welcome move. As RBI allowed all Financial Institutions to provide customers with a moratorium of three months for repayments of Term Loans amidst of COVID-19 situation; most of the Public sector Financial Institutions have informed their customers about deferment of EMIs and Interest.

What does that mean?
The RBI allowed all lending institutions to offer a moratorium to borrowers on repayment of all Term Loans. All Term Loans (including Agricultural Term Loans, Retail, Crop Loans and loans under Pool Purchases) and Cash Credit/Overdraft are eligible to avail the benefits under the package. This moratorium also covered credit cards. The moratorium was for payment of all installments falling due between March 1, 2020, and May 31, 2020.
However, RBI did not order Financial institutions to provide such relief. It gave the option to Financial Institution to take a call on whether they are in a position to extend such assistance to customers.

Now, Let’s Flip the card and see what it is underneath. While opting for an EMI deferment scheme a Borrower should remember:

  • The moratorium is for Payment of EMIs, not on Interest; That means if a borrower has a Live Loan, then payment of EMIs of March, April & May is not required. However, this does not imply three months EMI has been waived. It is only a grace period, not a Waiver of the Loan. Financial Institutions are likely to charge interest amounts for unpaid amount and deferment will result in Higher Interest Amounts. These decisions may vary across lenders.
  • Also, the Rescheduling of Principle can be done for three months falling due between March 1,20-March 31,20. Still, Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period as prescribed by RBI.
  • The recovery of Interest applied to Cash Credit/Overdraft will be deferred as on March 31, April 30 and May 31, 2020. However, the entire Interest must be recovered along with the Interest being applied on June 30, 2020, and in cases, where monthly Interest is not being applied, the unapplied Interest to be recovered along with the next interest date.

Now Let’s take an example to see how it will impact a live loan. For a Home Loan of INR 30 Lakhs with a remaining maturity of 15 years; the net additional Interest to be paid would be nearly 2.34 Lakhs or is equal to 8 EMIs. Similarly, for a Car Loan of INR 6 Lakhs with a remaining maturity of 54 months, the additional interest payable would be 19,000 or equal to 2 EMIs.

Experts also say that Credit Card late payments can significantly increase dues as they get added directly to the bill. Therefore, if the Borrower is also a credit cardholder, paying monthly dues is the best practice, even if there is a moratorium of three months. In a nutshell, the RBI’s moratorium on loans is not a waiver offering immunity from rising interests. This is necessary for only those who are facing a financial crunch due to the ongoing economic turmoil due to the lockdown. Individuals/Entities who are well-positioned to repay their loan on time should obtain regular repayments.

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