Moratorium a good option for the cash-starved, banks to take final call

The Reserve Bank of India’s (RBI’s) decision to cut rates as well as provide a three-month moratorium for equated monthly instalments (EMIs) will come as a significant relief to borrowers. This is because many fear job losses or salary cuts or delays due to the coronavirus (COVID-19) outbreak.

For instance, the aviation sector has already cut salaries or given leave without pay to many employees. Reduction of financial burden now would help their cash flows significantly. Others who will benefit from this move include self-employed persons, who usually avail cash credit/overdraft facility as working capital.

Virendra Sethi, head – mortgages and other retail assets – Bank of Baroda, said, “For new borrowers as well as existing ones, where loans are linked with repo rate, EMIs will reduce. The pricing will change immediately.” Reduction in rates for customers linked to the marginal cost-based lending rate or MCLR is also expected.

Adhil Shetty, chief executive officer (CEO) of Bankbazaar, said, “We are expecting to see reduction in rates of MCLR-linked loans as well. Banks are expected to announce these cuts over the coming days, gradually.”

The moratorium is for three months on payment of all instalments due between March 1, 2020, and May 31, 2020, including credit card payments.

Kunal Varma, co-founder, MoneyTap, said, “This means that customers may be allowed to defer their immediate EMI payments, but come June, they will have to resume them. It is not a waiver, but only a shift in payment schedules.” As the RBI circular clearly mentions, “The accumulated accrued interest shall be recovered immediately after completion of this period.”

However, while all banks and non-banking financial companies (NBFCs) have been allowed to take this measure, each bank will have its own board-approved policies. So, the terms and conditions may differ. While State Bank of India has decided to cancel all EMIs on term loans, other banks or NBFCs may not follow a similar policy.

While EMI moratorium may be a relief for many, it’s not going to happen overnight or may not happen automatically since banks have been allowed to decide which borrower deserves this relaxation.

For example, if you have an EMI coming up, and there isn’t a sufficient amount in the bank, the best solution would be to inform the bank in advance and seek deferment of payment.

Varma said, “For banks and NBFCs, there’s a lot of work involved in implementing this. It will start with alignment of repayment schedules, accounting changes, provisioning schedule changes, reporting changes and all of that finally going through a board approval before implementing this policy on an urgent basis.”

This means if you have an EMI hitting your bank soon, make sure that you keep adequate funds, especially, if it is a home loan. Don’t let it bounce, thinking it’s under moratorium.

Varma added, “In case you are offered this facility and have the ability to pay due to salary income being intact, you should compare your original cash flow with the revised repayment schedules and accrued interest payments. Then, take a call on what makes most sense for you.” You should take an EMI moratorium only if you really can’t afford to make a payment.

The good news is credit information companies will not classify them as defaults and downgrade your score. The circular noted: “The rescheduling of payments, including interest, will not qualify as default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. CICs will ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries.”