EMI Moratorium Benefits And Drawbacks

Because of the outbreak of Covid-19 many people suffering a lot; one of those is self-employed people. When everything is right, they used to pay their EMI’s on the right date. But in this situation, paying monthly installments has become a major problem. Many people have become unemployed, and their salaries are paid much lower than usual. Business markets have seen their downfall. Everything is in a bad state. One has to think about whether to continue the loan or surrender the loan. To help people who can’t pay their monthly installments Reserve Bank of India has started on March 27th, 2020. The RBI sends a notification to all banks and non-banking finance companies to allow “3 month EMI moratorium” on payment of all installments falling in the term of March 1st, 2020, to May 31st, 2020.

“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 installments 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, maybe shifted across the board by three months”- RBI.

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49582

But why RBI has taken this step? What is the benefit that comes from this statement? What happens if we choose this step? So let’s dig this topic more!

What Is The EMI Moratorium?

When we take a bank loan, we generally repay them monthly with some monthly installments. We say as EMI (Equated Monthly Instalment). But when the borrower cannot pay his EMI because of some financial issues, he can intimate with the bank. On some terms and conditions, the bank can give benefits. Because of the outbreak government decided to start the lockdown process all over India. This has created financial problems for self-employed people and some employees. Considering all these, RBI decided to implement this moratorium scheme and intimated every bank to provide benefits to the borrowers.

According to this moratorium, the borrower can stop paying EMI for a particular loan for a particular period. This EMI will add up to the further outstanding loan (remaining loan money). The borrower can pay due to money in three ways:

1. He/she can pay the three months EMI at once and can continue his/her monthly installment payments without any change.

2. He/she can add the accrued money to the outstanding money and pay monthly by increasing EMI without changing the tenure.

3. He/she can add the accrued interest to the remaining money that has to pay and increase the loan tenure. In this case, there is no increase in the EMI.

It is the borrower’s choice to decide and later inform the bank about his/her decision. But this 3-months moratorium is purely based on the decision of the banks. RBI informed that it is the bank’s choice to implement this decision. But in this pandemic, banks have come up with their policies to satisfy their customers.

This EMI moratorium is for all types of loans. This scheme doesn’t change the loan’s policy conditions and doesn’t impact the borrowers’ credit scores. Credit Information Companies (CIC) ensures that no lending institute can impact the borrower’s credit history.

If you have a standing instruction (SI) to your bank about monthly installments, you have to intimate your decision; the money will get debited every month. We suggest you choose 3 months moratorium only if it is necessary. Because some points make you not opt for this condition, let us check those points.

What happens if we choose 3-months EMI moratorium?

To understand this better, let us take an example. Borrower A has taken a home loan, and the outstanding amount he still has to pay is worth 20 lakhs with an interest rate of 9% for 57 months’ tenure. The EMI he used to pay is ₹ 43,395. But because of his financial status, he opted for a 3-months moratorium/deferment. So let us investigate what happens if he chooses one of the three options mentioned earlier.

i. To Repay The Interest All At Once

If you are well prepared and ready to pay back the interest after completing the moratorium period, you can choose this option. In this case, all the interest that has mounted up can be repaid at once, and there is no need to increase either EMI or tenure period. But the only thing that bothers is whether you could save up the money for repayment. If you are not able to gather up, then choose the remaining two options.

ii. To Repay By Higher EMI

To understand this option, you have to consider an example. For suppose you have taken a loan of 40 lakhs and you maintained to pay EMI regularly. But because of the lockdown period, you are in a financial problem, and you choose the moratorium option. Here you have an outstanding amount that has to pay back is ₹20,00,000 with an EMI of ₹40,000 with an interest of 8.5%. The tenure period is approximately 62 months.

When the moratorium ends, the extra money added to the outstanding loan because of adding a pile of interest on interest is ₹80,000. Then you decided to hike the EMI so that it takes less time to cover the loan. To settle your payment in the same tenure, you have to raise your EMI by ₹1500 to ₹2000. The total EMI that you have to pay once the completion of your moratorium period is ₹ 41,500 to ₹ 42000 (approximately).

iii. To Repay By Increasing The Loan Tenure

Let us take the same example that I have discussed above. With an EMI of ₹ 40,000, you have an outstanding amount of ₹ 20 lakhs with a tenure period of 62 months and an interest of 8.5%. Now you decided to raise your tenure period without changing the EMI of the loan. To cover the moratorium period money, the tenure will rise by 2 months, i.e., equal to 64 months.

To understand it clearly, I have used a tabular form. It contains different ranges of outstanding loans from higher to lower. If we see clearly, we can say that when the outstanding loan is more, then it’s better to raise your EMI rather than going for the remaining two options. But if the outstanding loan is less like 3rd example, it’s better to choose the moratorium period’s interest in one go and continue your normal policy. So choose best based on the outstanding loan amount.

Why Shouldn’t We Opt For 3-months EMI Moratorium?

The reason is simple if we understand the above example. Once you stop paying the EMI for one month, this money will be added to the next month. You have to pay interest to this more amount along with regular EMI. Finally, it goes on increasing the interest on interest. The process that goes in every bank is bank gets money from some lenders and lends it to the borrowers. So if the borrower stops paying his EMI, it becomes difficult for the bank to pay for the lenders.

So banks charge extra interest to the borrowers to repay the lenders. If you take advantage of this moratorium period, it might end you up in a loss, and also it is our responsibility to help the government in this pandemic. We can’t just see our own benefits. If you are a government employee or an employee whose job is safe, pay your monthly EMIs and help banks repay the money to lenders. Choose this option only if you’re financially unstable.

Tip:

We suggest you consider this option only if you are facing financial problems in the present situation. Don’t avail of this option to avoid paying EMI. If you take this option as an advantage, you may pay more money to the bank, which is not beneficial to you. It is only a benefit for the bank! But if you don’t have any further option, pay the “minimum due amount” and pass the balance amount to next month. Then the outstanding amount will become less, and so you can repay it comfortably.

According to RBI’s conditions, when a borrower cannot pay his EMI, then his account is treated as a special account, and any default payments should be verified within 30 days by the respective bank. It is better for credit cardholders to not opt for moratorium/deferment because the finance charge on credit card bill varies from 24 to 29% per annum.

This amount extra is added to the outstanding loan, which raises a financial problem for the borrowers. So to avoid this problem, credit cardholders have to change their due to EMIs. The reason is that they charge for EMIs is less when compared to the finance charge on credit card dues.

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