Overview of the 6-month EMI Moratorium Announced by the RBI
India went into a nation-wide lockdown in March as a preventive measure to curb the spread of the deadly Coronavirus. As a result, millions of businesses – big and small – that do not fall into the category of essential services had to pause their operations. A group of white-collar workers like software engineers was able to leverage work from home and continue their day-to-day operations uninterrupted. However, millions of other workers – both blue-collar and white-collar workers – had to face a severe financial crunch due to the mandatory lockdown.
India's government introduced several measures to offer interim financial relief to millions of citizens facing a severe disruption in their household incomes. One such measure is the – EMI moratorium announced by the RBI.
Initially, the RBI instructed all financial institutions – commercial banks and NBFCs – to grant a three-month moratorium to all borrowers on their EMIs and credit card payments. In June, the RBI extended the moratorium by an additional three months. Currently, the moratorium is offered for six months, starting from 1st March to 31st August.
The EMI moratorium announced by the RBI offers much-needed financial relief to millions of borrowers facing liquidity issues due to the economic impacts caused by the Covid-19 pandemic and the mandated lockdowns. However, not many are aware of the RBI EMI moratorium and what it entails. Let's take a closer look at this article.
Additional Reading: Moratorium Period Extended for 3 More Months: 5 Things You Must Know
5 Important Points to Know about the RBI EMI Moratorium
The six-month EMI moratorium is offered for all EMI payments falling between 1st March 2020 and 31st August 2020. This means borrowers facing a financial crisis due to the impacts of Covid-19 can skip their monthly instalments during this period.
The moratorium is offered for all loans, including home loans, auto loans, two-wheeler loans, personal loans, working capital loans, loans against property, etc. Besides loan EMIs, the moratorium is also offered for credit card dues.
Note that the moratorium is NOT a waiver. Borrowers will continue to accrue interest on the outstanding amount during the moratorium period.
Post-moratorium, borrowers will have to pay the additional interest accrued during the moratorium by increasing the EMI (monthly loan instalment) or extending the loan (number of instalments).
Opting for the moratorium will not lead to a negative impact on credit score for individuals. Similarly, corporates that choose for the moratorium will not be subjected to a credit downgrade.
Key Highlights of the RBI Circular on EMI Moratorium
As per the RBI directive, all banks, NBFCs, MFIs are instructed to offer their customers the option to defer term loan payments during the moratorium period. The moratorium is provided for all types of loans like personal loans, home loans, car loans, agriculture loans, business loans, working capital loans, overdrafts, etc. Loans on consumer durables like refrigerators, air-conditioners, TVs, etc. are also applicable under the moratorium.
The RBI has clarified that the moratorium is also applicable for credit card dues. Borrowers who opt for the moratorium will not have their credit scores impacted negatively. Here are a few key highlights of the circular:
All commercial banks offer the moratorium – this includes public banks, private banks, small rural banks, co-operative banks, NBFCs, microfinance companies, housing finance companies, etc.
Individual banks are free to frame the moratorium rules and regulations, as per the needs of their customers. Banks can offer a moratorium on default to all customers or extend the facility only for customers who voluntarily opt for it.
Deferment of EMIs and credit card bills during the moratorium period will not impact the individual's credit score.
Customers who opt for the moratorium can defer both their principal and interest payments.
Should Individuals/Businesses opt for the RBI EMI moratorium?
If you're facing disruption in your household's cash flow due to Covid-19 lockdowns like a layoff, loss of pay, or reduced income, you can opt for this relief package announced by the RBI. The same applies to your business. If your business is facing a severe working capital crunch due to pause in operations during the lockdown and unable to pay salaries or suppliers, the relief package is a huge blessing.
However, before you opt for the moratorium, you have to weigh the relief measures' pros and cons to decide whether it is the right choice for you. Remember that though EMI payments are deferred, the interest continues to accrue on the outstanding loan amount. This leads to a higher loan cost, post-moratorium. Either your EMIs will be increased, or the loan's tenure will be extended to accommodate the increase in interest.
Let's explain this with an example. Consider you have taken a personal loan of Rs. 3 lakhs, and the outstanding amount is Rs. 1 lakh. Assume that the interest charged on the loan is 12% per annum. By opting for a three-month moratorium, the additional interest is Rs. 3030.10, which increases the overall loan burden.
Opting for the moratorium is significantly higher for big-ticket loans like home loans and loans against property with sizeable loan amounts and long tenures.
Undoubtedly, the RBI EMI moratorium offers a massive relief to individuals and businesses facing cash flow and income disruptions during these challenging times. By opting for the moratorium, individuals/businesses can defer their EMI payments without incurring any late payment charges. Also, the credit scores of borrowers who opt-in are not negatively impacted.
However, one major disadvantage of the moratorium is that the outstanding amount continues to accrue interest during the moratorium. This increases the overall loan cost. Hence, it's highly recommended that borrowers with sufficient liquidity should continue making payments as per their original repayment schedule.
So, should you opt for the moratorium or not? The answer does not go for it unless it is absolutely necessary, and you don't have any other option.