RBI announced 3 months EMI Moratorium on loans. People rejoiced and there was a big relief on many thinking they are now safe for the next 3 months. However, the reality is entirely different.

What is the meaning of 3 Months Moratorium?

As per the definition of the dictionary, Moratorium means ‘A legal authorization to debtors to POSTPONE the payment’. You are just allowed to postpone your EMI for 3 months but your EMIs were NOT WAIVED OFF.

Due to the 21 days lockdown across the country, many businesses are suffering. Hence, to give a rest for loan repayment for retail borrowers, RBI announced this 3 months moratorium.

If due to financial problems during these three months, you are unable to pay the EMI, then such non-repayment is not considered as DEFAULT.

Image of House with Coins3 Months EMI Moratorium on loans – What it is actually?

  • Banks which are eligible for providing 3 months EMI Moratorium-

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 installments.

  • It is not WAIVER but DEFERRING

Many thought that it is a waiver of your EMI for the next 3 months from Government. However, it is just deferring your EMIs. Hence, you can’t run away from these 3 months EMI.

  • Types of loans eligible under 3 months EMI moratorium-

Term loans, including agriculture term loans and crop loans besides retail loans, are part of this moratorium.

Retail loans are typically home loans, personal loans, education loans, auto and any loans that have a fixed tenure. They also include consumer durable loans, such as EMIs on mobiles, fridge, TV etc.

  • Credit card payments are also part of this 3 months EMI moratorium-

Earlier there was confusion on whether the credit card payments are also the part of 3 months EMI moratorium or not. However, later RBI cleared this doubt and such credit card payments are also now part of this 3 months EMI moratorium.

  • Your loan tenure will increase by 3 months-

If you opted the 3 months EMI moratorium, your loan tenure will increase by 3 months. Suppose your loan tenure is 20 years, then now the loan tenure is 20 years and 3 months.

  • Only RETAIL loans are covered but not BUSINESS loans-

This 3 months EMI moratorium covers only retail loans but not any business loans. For Business Loan or Working Capital Loan, Central bank has deferred the payment of interest for period as on March 1, 2020 up to May 31, 2020. Businesses will be required to pay off the entire accumulated interest after the expiry of moratorium or deferment period.

  • Eligibility EMIS Moratorium-

EMIs due between 1st March 12020 to 31st May 2020 are eligible for such moratorium.

  • It is not a DEFAULT option but you have to approach the bank to avail this moratorium-

Banks may provide this moratorium on their own. However, as of now, it is clear this it is not a default option on all EMIs. You as a borrower have to approach the bank and opt for this moratorium by mentioning the reasons of difficulty in paying the EMI.

However, considering the severity, we think banks will not look for reasons but provide this moratorium to all those who wish to opt.

However, as of now, RBI is clear in this regard with this sentence” accounts provided relief under these instructions shall be subject to subsequent supervisory review with regard to their justifiability on account of the economic fallout from COVID-19.”

  • Impact on Credit Score-

As this is considered as a deferment than the default, such moratorium will not affect your credit score. Hence, no need to worry on credit score front.

3 Months EMI Moratorium on loans – Don’t opt-

Why we should not opt this 3 months EMI moratorium on loans? The reasons are as below. The biggest reason for saying DON”T OPT is the below lines from RBI notification.

> It is not a WAIVER but a DEFER-

As mentioned above, RBI not waiving your 3 months EMI. However, provided you an option to defer it. Hence, no such benefit for all of you. You are just deferring your EMI.

In general terms if we say, if your loan tenure is 120 months, then it will increase to 123 months. But in real sense it is not simple as it is. Lets see the example,

Outstanding

Term(Months)

Moratorium

Term (Months)

Effective Revised

Term(Months)

Extra EMI (Nos)
36 3 40 1
60 3 65 2
120 3 128 5
180 3 191 8
240 3 258 15

** (EMI- Number of Moths   Assums-8.50% Home Loan Interest Rate. As Interest rate increases EMI will also Increases)

See how many Extra EMI required to pay and take the decision.

> You pay HIGHER interest-

Assume that you have Rs. 30 Lakh loan with 8% interest. Assume you opted for this 3 months EMI moratorium, then during such moratorium period, banks will calculate the interest on this outstanding Rs.20 lakh at 8% and the monthly interest of Rs. 20,000/- (Rs.30,00,000*8%*1/12).

Hence, if you opted for this 3 months moratorium, you have to additionally pay Rs. 60,000/- interest for 3 months on your outstanding just because you deferred your EMI. Interests due in 3 Months will be added to principal on July 2020 Onwards.

However, as of now, it is not clear how you have to pay this interest. They will adjust to your EMI and your EMI may slightly get increased.

Hence, this is nothing but deferring your credit card payment dues for 3 months.

  • Heavy Interest on Credit card payments for 3 months EMI moratorium-

All credit card holders will charge heavy interest after opting for 3 months moratorium period. Generally credit card companied will charge 18% to 24% p. a. interest for late settlement of credit card dues.

  • Deferment of interest payments for Business loans-

The central bank has deferred the payment of interest for all business loans or working capital loans outstanding as on March 1, 2020 up to May 31, 2020. Businesses will be required to pay off the entire accumulated interest after the expiry of moratorium or deferment period. This will increase the burden on corporate borrowers.

> Available for those whose income affected due to Coronavirus-

All are not eligible to avail this 3 months moratorium. If your salary or income affected due to this Coronavirus outbreak, then you have to approach the bank and convince the reality. Based on that only banks can offer you such moratorium.

However, considering the impact of Coronavirus on all of us, banks may provide this to all who approach the bank. But remember, it cost you more.

Conclusion:-It is clear now that there is no point in opting for this moratorium. If your income is intact or you have sufficient emergency fund placed to face such a situation, it is far better to let the EMI continues than opting for EMI moratorium.

In the end, banks are not under loss by providing this moratorium but you will be under loss by opting this.

IF YOUR INCOME IS INTACT OR YOU HAVE SUFFICIENT EMERGENCY FUND PLACED TO COVER INCOME LOSS, THEN DON’T OPT FOR THIS 3 MONTHS EMI MORATORIUM. LET YOUR EMI CONTINUE.

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Qualification: CA in Practice
Company: V R Malave & Associates
Location: Kolhapur, Maharashtra, IN
Member Since: 20 May 2017 | Total Posts: 3
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