Covid-19 Impacts: RBI offers Three Month moratorium on EMIs and Credit Card Payments..!

Covid-19 Impacts: RBI offers Three Month moratorium on EMIs and Credit Card Payments..!

by Deepesh Raghaw, Personalfinanceplan.in

When the entire country is locked down to prevent the spread of coronavirus, it is obvious that many people will struggle with cashflows. While the salaried people may have nothing to worry about in the very short term, it can start becoming a problem for them too if we don’t’ manage to control the spread of the virus and the lockdown is extended.

However, it is the self-employed, professionals, business owners, shop keepers and traders who must face the immediate brunt of this lockdown. And I can understand the plight of daily wage earners during these extraordinary times.

Due to the lockdown, the cashflows may go down or disappear completely (if your work required person-to-person contact) but expenses won’t. You still need to pay your loan EMIs and this can be a pain-point for many borrows.

Taking cognizance of the situation, the Reserve Bank of India has provided relief to many loan borrowers in its Covid 19 relief package. It has allowed banks to provide a moratorium on loan payments to both business and retail borrowers.  In addition, the RBI has also cut Repo rate by 75 bps. There are additional steps taken such as CRR cut and MSF rate to inject market liquidity and spur lending.

In this post, let’s focus on those aspects of relief that affect retail borrowers directly and immediately. To begin, I copy an excerpt from RBI Press Release.

All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.

RBI Covid-19 Regulatory package expands on the press release and provides further clarity. I reproduce the relevant clauses.

In respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) (“lending institutions”) are permitted to grant a moratorium of three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020. The repayment schedule for such loans as also the residual tenor, will be shifted across the board by three months after the moratorium period. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period.

Instalments will include the following payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly instalments; (iv) credit card dues

What does this mean?

If your bank permits, you will get a moratorium on loan EMI payments you won’t be required to pay any EMIs if the due dates fall between March 1, 2020 and May 31, 2020. For retail borrowers, this applies to all kinds of term loans including home loans, personal loans, education loans, gold loans and auto loans. The moratorium applies to both interest and principal payments i.e. nothing needs to be paid. The relief also extends to credit card payments falling due between March 1, 2020 and May 31, 2020.

Notice the big “IF”.

For you to get this relief, your bank must permit. It is the bank’s choice.

As per RBI press release, the banks must take approval from the board and intimate the borrowers.

The banks may provide this relief for a certain category of loans or to select customers. It is possible the bank may give the borrowers to opt for this relief. In such a case, if you don’t want this relief, you can opt out.

What this does not mean?

This is not a waiver on EMI payments. You must still pay the due.

This is just a deferral.

Your repayment schedule will simply be shifted by 3 months. If you take this relief, your repayment schedule will just be shifted by 3 months (or 2 months depending on unpaid installments during this period).

Therefore, if your loan tenure was ending in April 2030. It will now end in July 2030 (if the relief is provided and availed).

Will my next EMI be deducted?

As discussed, the bank decides whether you should get relief.

If the bank has allowed EMI deferral for your loan account, the EMI will not be deducted.

RBI has not defined the process of how this entire deferral will be put in place. Do you have to approach the bank? Or the bank will approach you? Will there be a two-way consent i.e. the bank must offer, and you must accept? OR the bank can do this for your account on its own?

Reach out to the bank for better clarity. I would expect the banks to put information about this on their websites soon.

Until there is no clarity, do not assume anything.

There is no free lunch

If you get this relief, the interest will continue to apply (even though you don’t have to pay) and will accrue to the loan outstanding. Your loan outstanding will be adjusted upwards due to this accrued interest at the end of the moratorium period. Accordingly, your EMI or loan tenure will go up.

Will the non-payment affect my credit history?

Again, there is a big “If”.

If your bank provides the relief and you do not make the payments, your credit history will not be affected. However, if your bank does not provide this relief and you still skip the payments, your credit history will be adversely affected.

Does this apply to credit card payments too?

Yes, it does (again, it’s the bank’s choice)

However, as mentioned earlier, the interest rate will continue to be charged. And the interest rate on credit card debt is very high. Hence, it is a good idea to make repayment to the bank.

Repo Rate cut by 75 bps to 4.4 p.a.%

This is massive.

If your home loan is benchmarked to RBI repo rate, then you will see immediate relief (depending on the interest rate reset period) in the form of a lower EMI. To give a sense of the impact, let’s consider an example. Let’s say your outstanding home loan amount is Rs 60 lacs. The remaining tenure is 15 years and the interest rate is 8.5% p.a. I assume the loan is linked to RBI Repo rate.

After the repo cut, your loan interest rate will move down to 7.75% p.a.

With this cut, your loan EMI will go down from Rs 59,084 to Rs 56,476. This is a significant saving.

If your loan is linked to internal benchmarks such as MCLR or base rate, transmission should happen in those cases too. However, the banks somehow manage to not pass rate cuts in entirety.

If you are on an MCLR linked home loan, this might be a good time to consider switching to Repo rate (or any other external benchmark linked home loan).

While the RBI has provided a short-term relief, what we need is a sustained long-term relief from this Coronavirus scare. And that can happen only if we score a win over the virus. Stay home. Stay safe and help stop the spread of virus!!!

Share: