The Reserve Bank of India recently announced an extension of the 3-month moratorium given to borrowers due to the uncertainties caused by the Covid-19 outbreak. Initially, the RBI had announced the moratorium from March 2020 to May 2020. Now, with the extension, borrowers can defer paying their loan EMIs and credit card bills for an additional 3-month period from June 2020 to August 2020. 

At first glance, the moratorium appears as a massive relief to borrowers, easing their financial strains during these uncertain times. However, before you rush and opt for the three-month extension, you must first consider the pros and cons of the moratorium on your finances. 

Here, in this blog, we help you analyse the financial impacts of the six-month moratorium, helping you figure out whether it is the right choice for you. 

Impact of six-month moratorium on one’s finances

With the three-month extension, borrowers can now stop paying their term-loan EMIs for six months, starting from March to August 2020. Deferment of EMIs will not impact the borrower's credit score, nor will it attract late payment penalties and other charges.

However, borrowers have to understand that the moratorium leads to various negative financial impacts – both in the short-term and long-term. In the short-term, borrowers who opt for the moratorium will not be eligible for new debts in the near future. 

In the long-term, opting for the moratorium will lead to a larger loan burden for borrowers. It's worthwhile to re-emphasize that the extension of loan EMIs only puts off EMI payments temporarily. Your loan continues to earn interest on the outstanding principal.

There are three possibilities on what happens to your loans when you opt for the moratorium:

  1. The borrower can pay the accrued interest for the six months (from March to August) as a one-time payment. This way, you can continue with your previous EMI after the end of the moratorium.

  2. Alternatively, the accrued interest can be added to the outstanding loan principal. This increases the EMI for the remaining tenure. 

  3. Finally, the accrued interest can be added to the outstanding principal. However, borrowers have the option to keep the EMI unchanged while extending the remaining tenure.

The number of additional EMIs and the tenure extension depends on the interest rate and the remaining tenure.

Let’s explain the impacts of opting for the moratorium with an example. Let’s say a borrower has taken a home loan for Rs. 30 lakhs at 9.5% for 20 years. The EMI stands at Rs. 28,000. 

Now, by availing the moratorium, the borrower doesn’t pay EMIs for six months. In this case, he falls back on the loan payment by 28,000 x 6 = Rs. 1,68,000. He opts to keep the EMI unchanged by extending the tenure. His loan is extended by four additional years, and he pays added interest of Rs. 11.4 lakhs. That’s a huge increase in the loan burden. 

As you can see, by opting for the moratorium, the borrower increases the loan burden significantly. This is why financial experts highly urge borrowers to keep paying their EMIs, unless in emergency situations.

Now, let’s answer a few common questions, borrowers have regarding the impact of the moratorium on their finances. 

Does opting for the moratorium impact a borrower’s credit score? 

Opting for the moratorium will not hurt your credit score directly. Meaning, your lender will not notify the credit bureaus, and your loan will not be reported as an NPA (Non-Performing Asset).

With that said, opting for the moratorium could impact your borrowing capabilities in the coming months. Generally, lenders are likely to be extra cautious while sanctioning loans to borrowers who have availed the moratorium. Note that this is a temporary effect. It could impact your borrowing capability for the next three to twelve months.

Borrowers are likely to lose confidence in your ability to repay a long-term loan when a two-month disruption throws your repayments off-track. Borrowers who opt for the moratorium are likely to see a dent in their eligibility to avail future loans.

I have availed the three-month moratorium. But, my cash flow issues have resolved now. What’s the best course of action I should take? 

One of the main reasons why many borrowers opted for the initial three-month moratorium (Moratorium 1.0) was due to the lockdown and prevailing uncertainty. With lockdown restrictions eased and relaxations announced, a large number of people have got back to work.

If you do not have any pressing cash flow issues, the prudent choice would be not to opt for the three-month extension of the moratorium (Moratorium 2.0). 

I did not avail of the three-month moratorium. Can I opt for the extension now?

Remember that opting for the moratorium comes with a financial cost. If you are having cash flow problems or predicting financial difficulties in the next few months, it makes sense to opt for the three-month extension on the moratorium. Choosing for the moratorium is better than defaulting on your loan EMIs. However, if you don't have any pressing cash flow problems, it’s better to continue paying your EMIs, instead of opting for the moratorium. 

Note that the six-month pause is only for EMIs and not for the interest charged on your loans. 

Additional Reading: Moratorium Period Extended for 3 More Months

Does opting for the moratorium impact my creditworthiness? 

Yes. If you have opted for the six-month moratorium, your EMIs would be paused for five to six months, depending on when you signed up.

Most banks would not offer to give you EMI-based loans for at least the next twelve months. Additionally, you would have to pay EMIs for at least six months after the moratorium period to improve your creditworthiness.

What are the alternatives available to borrowers instead of opting for the moratorium? 

If you are running a business, you can reach out to your bank to see if you are eligible for ECLGS. ECLGS (Emergency Credit Line Guarantee Scheme) aims to offer financial relief for qualifying MSMEs during this pandemic. Instead of temporarily pausing your EMIs, you can opt for this scheme to better manage your business cash flows.

If you're an individual borrower, you can try paying your loan EMIs using other means like using your emergency funds, borrowing from friends and family, seeking financial assistance from your employer, etc.


Opt for the Moratorium only after a Careful Analysis of your Financial Situation

The extension of the moratorium on term loans by an additional three months certainly comes as a massive relief to numerous borrowers. Primarily for individuals struggling with a financial crisis as a result of the economic fallout due to the ongoing Covid-19 crisis.

However, opting for the moratorium could lead to long-term negative financial implications. So, make sure to consider all the aspects of the moratorium before you choose it.