Money & Banking

EMI deferment: Pain for customers, gain to banks

G Naga Sridhar | Updated on April 03, 2020


It takes time for things to unfold. More so in bank schemes and welfare measures. When Finance Minister Nirmala Sitaraman had announced Garib Kalyan along with three month deferment of Equated Monthly Installments (EMIs) for all term loans, there was merry all around. An Aam Admi was obviously happy given the loss of earnings, pay cuts and delays in salary payments.

But now there is clarity. The facility, which has been dubbed as a saviour of the middle class by some analysts, is actually a punishment.

When a loanee avails the deferment of EMIs for months (March to May 2020) that amount will get added to the total principal amount and the interest on loan will increase.

State Bank of India clearly reveals in its notification on the facility, it says: ``Interest shall continue to accrue on the outstanding portion of the Term Loan during the moratorium period.'' This becomes a huge burden,

For instance, the impact of deferment in case of a home loan of ₹30 lakh with a remaining maturity of 15 years, the net additional interest would be approx. 2.34 lakh equal to eight EMIs.

So, for non-payment of three months instalments, the loanee would end up paying interest for eight months.

In case of car loans of ₹6 lakh with a remaining maturity of 54 months, the additional interest payable would be ₹19,000 equal to additional 1.5 EMIs.

Customers of all other banks too have a similar predicament. And, by any chance one prefers to exercise the option for credit cards, debt trap is certain because of high interest rates.

This is the crux of the matter. Given the fact that most of the middle class avail home loans of up to ₹30 lakh and car loans as mentioned above, the deferment facility announced by the Centre can be described as penalty on customers for the lack of health infrastructure or government's inability to come to the aid of a common man at a time when he is facing the biggest ever health hazard.

From the bank point of view, there is no loss at all. In fact, they have been shielded from possible defaults and bad loans (NPAs) because of this scheme. Their assets are safe and now yield them much more higher return in the way of total hike in interest rate for the entire tenure of the period.

The last smile will be for the Government as it can claim to be the saviour of the middle class with `right interventions'.

In a nutshell, the advantage of EMI deferment scheme is a myth. The reality is pain for customers, gain for banks and fame for the government.

There is a need to correct this urgently either by interest subvention to reduce burden on loan customers or limiting interest payment only to the three EMI amount for a specific period.

Published on April 03, 2020

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