After the onset of Covid-19 pandemic, the Reserve Bank of India announced a 3-month moratorium on term loan repayments as part of its economic relief measures. This moratorium applies to all payments between March 1-May 31, 2020 and also covers credit card dues. While most borrowers welcome this move, they have a lot of questions regarding the moratorium on all term loans. They are especially concerned about the exemption from payments, the accrual of interest arrears and the eligibility assessment, parameters which may vary from lender to lender.
Here are a few things you should keep in mind if you have opted for the moratorium.
Moratorium Not Applicable to Interest
The government has now instructed all banks to give borrowers a three-month grace period for payment of EMIs. If you have an ongoing loan, you need not pay the EMI for March, April and May. However, this should not be confused with a complete exemption on EMI payments. It is important to remember that it has not been waived, only postponed. This has been reiterated many times by government sources, but once again, this is only a deferment and not a waiver of your loan.
Interest on Unpaid Amount
Banks will likely levy the interest for three months on the unpaid amount. However, these measures could vary across individual lenders, they are subjective. Whereas some may choose to extend the loan tenure, others may seek a bullet payment in June or hike the EMI from June onwards.
Additional Reading: Moratorium Period Extended for 3 More Months: 5 Things You Must Know
The complexity of Credit Card Dues
The interest that accrues in case of credit cards is a slightly more complex case. The RBI has made it clear that the dues payable on credit cards will also get the grace period but the interest cost of this deferment could be huge. In a normal scenario, one can defer payment by paying 5% of the due amount while the unpaid amount is carried forward to the next billing cycle and 2-4% interest is charged. As part of the relief package, if you choose to skip a payment for three months and the bank decides to charge normally, the cumulative interest could go beyond a hefty 6-12%. Moreover, any additional spends would also accrue interest from day one.
Grace Period for All
If you do not pay credit card dues by the due date, your bank will automatically give you the grace period. In case there is an ECS mandate for the EMI and there is also enough balance in your account, the bank will debit the account on the due date. So, in case you are unable to pay at this point, you need to inform your bank about the situation. However, if you have a comfortable liquidity position and don’t want to unnecessarily incur interest costs, make sure you have paid by the due date.
No Impact on Credit Score
Missing payments and the respective deadlines may haunt you and your credit profile. As part of the Covid-19 relief package, however, your credit history will not be impacted due to non-payment and your credit score will remain untouched. This comes as a big relief primarily to self-employed people who could be under extreme financial stress due to the lockdown.
What Does Deferment Mean to The Borrower?
The relief package comes with a deferment of all EMIs on term loans such as business loans, agricultural loans, personal loans, mortgage loans, cash/credit overdrafts and loans under pool purchases. Credit card payments also come under the loan’s category. All payments that are scheduled between 1st of March to 31st of May, 2020, have been targeted by the Apex bank. Option to adhere to the moratorium is given to the particular bank whether it should implement the order. All nationalized banks are in sync with the order and so are most of the private banks.
Should You Opt for the Moratorium on Your EMIs?
While the scheme that has been announced promises relief to the borrower, there are some pros and some cons to be taken into account.
You can opt to defer the EMI payments, but remember that the meter on the interest will be ticking. It is important to remember that the grace period is for payment only; it is not a loan waiver in any way. The interest component will have to be paid across the loan tenure, and the lender will be the decision-maker in how to reschedule the payments in the future. Business revenues are nil at the moment, so this deferment can help the entrepreneur tide over the lean period.
The interest component will be added on the cash/credit and credit card loans to be paid after May 31st, 2020. The unapplied interest amount will be added to the Loan amount and recovered in due course by the lender.
All the options set forward by the RBI are to add interest due in full to the next EMI, increase the tenure of the loan, or increase the amount of each EMI. You can choose the option that suits you best. The lender will set forward the terms and conditions of the transaction and give you a choice in due course of time. The best choice is to add the small extra amount to the EMI, as a couple of hundred rupees will generally not be too big a burden for you.
The Covid-19 pandemic has created an unprecedented situation that has fuelled fears of economic depression and has also forced the government to allow extreme fiscal measures. It has prompted the Reserve Bank of India to announce a moratorium on term loans for three months from March 1st 2020 till May 31st 2020. While it is aimed to provide relief for the borrowers, it is beneficial only when you have a liquidity crunch and are unable to pay the amount due.