Decoding RBI’s 3-month EMI, loan moratorium: Should you avail it?

The Reserve Bank of India (RBI) recently allowed banks in the country to provide a three-month moratorium on fixed-term loan and EMI payments to help millions of people with bank dues during the novel coronavirus pandemic.

The banking regulator, however, did not order banks to provide such a relief. It gave the option to banks to take a call on whether they are in a position to extend the measure for customers.

Simply put, banks are not obligated to fulfil the RBI’s suggestion and can choose to ignore it on the basis of financial health. The country’s biggest public lender State Bank of India (SBI) has announced it would honour RBI’s request.

A moratorium, not waiver

Many economic experts said the terminology used by the RBI in the matter raised many doubts. Some reports show banks are still not ready to take any action on this announcement.

“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,” RBI said.

“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,” it said.

The last part of RBI’s statement on moratorium is exactly why individuals should not opt for the relief measure unless they absolutely need it.

Individuals should continue paying their credit card, EMI, retail loan instalments if they are not financially strained due to the ongoing Covid-19 lockdown.

For instance, if you avoid paying the monthly instalments on dues, then your interest will be calculated on a higher amount every month.

For high-ticket loans like home or vehicle loans, not paying the monthly dues for the next three months could increase the amount of interest you pay significantly.

Therefore, it is a last-ditch option for those who are facing deep fund crunch due to the prevailing situation in India due to Covid-19.

So the only relief one technically gets here is no impact on credit score due to non-payment for the next three months. This means the bank will not report defaults on such loans to credit score authorities for the next three months.

Try to clear off credit card dues

Individuals who can pay their credit card dues should clear it before the due date, despite the RBI’s moratorium option. Credit cards usually charge a much higher interest rate than other lending instruments.

Experts also say that credit card late payments can significantly increase dues as they get added directly to the bill. Therefore, if you are a credit card holder, paying monthly dues is the best practice, even if there is a moratorium of three months.

Individuals who have taken a marginal hit due to Covid-19 lockdown could try to clear at least the minimum balance due to avoid a sharp shock later.

Credit-card based payment app, CRED, also sent a note to some of its app-users informing them about the consequences of not paying instalments.

“CRED recommends that you continue paying your total due amount (or as much as possible) within the due date to avoid interest charges at 36 – 42 per cent compounding annual interest rate if you can,” it said in its note.

In a nutshell, the RBI’s moratorium on loans is not a waiver offering immunity from rising interests.

This is necessary for only those who are facing a financial crunch due to the ongoing economic turmoil due to the lockdown.

While SBI has already announced that it will honour the RBI’s recommendation, top private banks like HDFC Bank, Axis Bank and ICICI Bank are likely to come out with communication by tomorrow for customers.

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