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With the announcement of PM Modi a 21 days nationwide  lockdown  in response to the ongoing global pandemic called the Novel Coronavirus(COVID-19) on 24^th March 20 has resulted in complete shut down of  business activities which may pose huge challenge for people. Government has taken many far reaching steps in order to contain the spread of pandemic Coronavirus.

Under the prevailing condition, RBI has also come forward and announced that banks are allowed to provide a 3months moratorium for the loan’s EMI to all customers.

As per the directive of RBI,all 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 have been permitted to allow a moratorium of 3 months on repayment of term loans outstanding on March 1, 2020.

What is Moratorium Period?

Moratorium period refers to the period of time during which you do not have to pay an EMI on the loan taken. This period is also known as EMI holiday. Usually, such breaks are offered to help individuals facing temporary financial difficulties to plan their finances better.

What does it mean to borrowers?

Here, the instalments of term loans which were due on March 1, 2020 can be paid until May 31, 2020. The extension of payment is valid on instalment as well as interest. The Interest will continue to add on the outstanding amount during the moratorium period.

All retail Loans cover home loans, auto loans, personal loans, education loans and EMIs on purchase of mobiles, fridge, TV and gadgets, etc

What are the options under the Moratorium period?

Borrowers  who do not want to defer recovery of instalments /EMI: No action is required . They may continue to pay in usual course.
or
Borrowers who want to defer recovery of instalments/EMI:

Interest shall continue to accrue on the outstanding portion of the loan during the moratorium period. Eligible Borrowers will have two options to pay the accrued interest as below:

a. Upfront payment of accrued Interest on completion of moratorium period(at the discretion of banks). OR
b. Capitalize the accrued interest, which will be added to the loan amount outstanding and the same will be recovered by extending the term of the loan.

Will deferement of EMI impact my credit history?

Moratorium  will not result in Asset Classification downgrade, this would not lead to reclassification of asset or asset classification downgrade

The revised schedule of payment of instalments and interest will not be considered as a default. This will not adversely impact the credit score or history  of the borrowers.

Who should avail of moratorium package?

India’s lenders have begun offering moratoriums on loan repayments, as a relief to borrowers who have been hit by the Covid-19 pandemic.The details of relief package has been published by many banks on their websites, still there are catches if you opt for the moratorium

Borrower who think that their repayment capacity is impacted due to disruptions in  business operations/services resulting from outbreak of COVID-19 pandemic can avail of the package .

Under the moratorium period, Interest will continue to accrue on the remaining portion of loan during the moratorium period which will be increasing their loan burden in the long run.

Let us assume a borrower took a home loan of Rs60 Lakh @8.50% for 20 years. Suppose borrower wants to skip the EMI,the table shows how the moratorium will impact the repayment schedule for lesser and higher tenure of loan remaining.

Therefore, it is advisable for the borrowers to weigh all pros and cons before deciding for availing moratorium, otherwise it is better to continue paying the EMIs.From the financial planning perspective, it is a wake-up call if you don’t have a few months of expenses in an emergency fund. Start planning emergency fund now.

Financial impact of availing the Moratorium with lesser number of tenure remaining-Table A

Financial impact of availing the Moratorium with higher number of tenure remaining-Table B

Repayment schedule of -Table B

Ashok Kaushal,write to info@loanscankart.com for any queries.