Public sector lenders have swung into action after the Reserve Bank of India allowed all commercial banks to offer their customers a moratorium of three months on the repayment of term loans. Many have informed their customers about the deferment of EMIs and interest dues to help soften the blow due to the coronavirus crisis.
Here's why the three-month moratorium on your home or auto loan may not be such a great idea after all:
First, a little background. The moratorium is essentially available to instalments falling due on between March 1 and May 31. Despite this many borrowers were still getting sms reminders to pay their instalments on time. So, in order to make things clear, some public sector banks have taken to Twitter to announce their moratorium offer for their customers.
However, many lenders also advised borrowers not to make use of the moratorium offer in case they were in a position to pay their instalments on the due date. State Bank of India, the country's largest lender, was one such.
The bank cautioned its customers that deferment of EMIs offered under RBI's relief package could put an additional burden on them while advising borrowers to repay if they had the means. SBI said on its website that deferring EMIs on a thirty-lakh-rupee home loan with a residual maturity of 15 years would entail a net additional interest of approximately Rs 2.34 lakh. A back of the envelope calculation will that the sum worked out to as many as eight EMIs. In other words, if you defer three EMIs on your home loan, you will end up paying eight EMIs more.
HDFC Bank has said that the interest will continue to accrue on the principal outstanding for the period of the moratorium at the contracted rate of the loan. The tenure will get extended by the corresponding period for which the moratorium has been availed.
This means, if the EMI for the month of March 2020 has been paid and moratorium for April and May 2020 has been availed, then the loan tenure will be extended by two months. However, since the interest has accrued during the moratorium period, it will get loaded to the EMI at some point, and the borrower will invariably end up paying a higher to service the loan at the contracted rate.
This can be better understood with a small illustration. The instalment on a thirty-lakh-rupee home loan taken for 20 years at nine per cent rate of interest works out to about Rs 26,991. Let's assume you've serviced the loan for five years already, and need to pay another 180 instalments over 15 years. If you availed the moratorium in totality, and the EMI you would start paying in June would work out to about Rs 27,600. This works us to Rs 608 more per month or Rs 1,09,500 or thereabouts for the residual life of the loan. Your call on whether or not this makes financial sense.
Coming back to the lenders, Punjab National Bank has extended the term loan repayment period by three months, and has asked customers to contact their respective branches for further details.
Bank of Baroda has also increased the repayment schedule as well as residual period of the term loan by 3 months due to moratorium. However, interest during the moratorium period will continue to accrue and the recovery of interest on cash credit/overdraft during the period March 1, 2020 to May 31, 2020 (moratorium) deferred and will be recovered after moratorium period.