Personal Finance

Go for EMI moratorium only if you are cash-crunched

Radhika Merwin BL Research Bureau | Updated on April 02, 2020 Published on April 02, 2020

Banks will continue to charge you interest on the outstanding loan during the moratorium period, and this may cost you dearly

It has been a difficult past month for many of us, grappling with the lockdown and financial constraints amid the pandemic outbreak. For borrowers with large-ticket loans and limited sources of income, the next couple of months could pose several more challenges.

In a bid to ease the pain of repayment and offer some respite to borrowers, the RBI has allowed all banks and lending institutions to offer a three-month moratorium on EMI (equated monthly instalments) payments falling due between March 1 and May 31. But there have been frequent calls for clarity on the moratorium, given the ambiguity around the procedures and rules.

BusinessLine reached out to bankers and sifted through various FAQs put out on banks’ websites to understand the contours of the moratorium (relating to retail borrowers). While some of the conditions may vary from one lender to another, here is what borrowers broadly need to know and understand before opting for the relief on loan repayments.

The relief and who gets it

Let us first understand what moratorium means. It is the temporary postponement of payment of interest/principal/ instalments; here, it is for the period from March 1 to May 31. Remember, it is not a waiver of loan repayments.

Am I eligible for the three-month relief on loan repayments? This is the first question on the minds of most borrowers. According to the RBI’s notification, all retail loans — home loan, vehicle loan, credit card dues and personal loans, among others — are eligible for the moratorium. Remember though that you should have taken the loan on or before March 1 (a condition laid down by most banks). Also, if you already have overdues before March 1, you may be eligible for the moratorium only at the bank’s discretion.

So how does one opt for it?

In most cases, the banks by default will continue with your original repayment instructions — via standing instructions if the EMI payment is debited from your savings account in the same bank (from where you have taken the loan), or through National Automated Clearing House (NACH), if your EMI payment is effected through another bank account.

If you do not want to opt for the moratorium, then just sit back and don’t do anything.

But if you want to opt for the deferment of EMIs then you will have to submit a request to your bank. Many of the banks have already started sending out SMSes and e-mails to their borrowers, giving them the option to defer the payment on their loans. If you have not received any notification, you can go to the bank website and submit your request for the moratorium.

Here you could face some procedural issues with certain banks owing to the ongoing lockdown. In in the case of SBI, you have to download a form from the website, fill it up, scan it and e-mail it to the bank. Else, you can submit the handwritten form to the home branch. The procedure is simpler at leading private banks such as HDFC Bank and ICICI Bank, where you just need your loan account number to complete the entire process online.

What about already paid EMIs?

One query that many borrowers have is whether they can claim refund of EMI already paid or debited for March. According to the RBI notification, the deferment is applicable for three EMIs — of March, April and May. Hence many banks do give the option of claiming refund on payments already made for March.

According to CS Setty, MD - Retail & Digital Banking, SBI, the bank’s borrowers can submit the necessary forms and claim a refund. In case of payments executed from another bank account (non-SBI), it may take up to seven days for the refund to be executed. The HDFC Bank FAQ also states that borrowers can opt for a moratorium at any point of time during the moratorium period even if the EMIs are already paid. The already debited EMI will be refunded by the bank.

But not all banks appear to offer the option of refund. The ICICI Bank website states that any EMI paid before March 27 (when the RBI notification came in) will not be refunded. Hence, check with your respective bank or other lender on the refund rules.

Should you go for it?

This is an important question that all borrowers need to ask themselves. After all, there are no free lunches!

Now, it is true that you will not be charged a late payment fee for missing the EMIs if you opt for the moratorium. Also, the moratorium on payments will not qualify as a default and hence it will not affect your credit score.

But the bank will continue to charge you interest on the outstanding loan amount at the rate applicable for the loan during the moratorium period. This interest will be added to your principal amount and will lead to an increase in the tenure of your loan. This is a very important point that borrowers must keep in mind while opting for the moratorium, as the extension of the loan can cost dearly.

SBI has illustrated the impact of moratorium lucidly, by taking into account its applicable loan rate for certain categories of loans. For instance, in the case of auto loan, for an outstanding amount of ₹6 lakh with remaining maturity of 54 months, the additional interest payable on account of availing the moratorium will be about ₹19,000, equal to additional 1.5 EMIs. But in the case of a home loan of ₹30 lakh with a remaining maturity of 15 years, the net additional interest would be a high ₹2.34 lakh, equal to eight EMIs.

ICICI Bank has also illustrated the impact on a home loan. If a borrower availed a housing loan on March 1 from the bank for ₹1 crore with a loan tenure of 236 months, and opts for the moratorium, then the tenure of the loan will increase to 249 months.

It is clear that deferment of big-ticket loan payments can pinch you quite a bit. Hence go for the moratorium only if you are cash-crunched and are unable to make the payment. If you have sufficient funds, it does not make sense for you to defer your payments.

Also, even if you opt for the moratorium now, and your cash flows improve subsequently, make it a point to make you loans payments. Most banks give the option of making payments during the moratorium period without attracting any prepayment charge.

Credit card dues

All credit card customers are also eligible for the moratorium if they have been regular with their payments before March 1 on their credit card and loans taken on the credit card. However, it is advisable not to use this leeway, unless absolutely necessary.

Remember that the interest rates charged on your credit card dues can run up to 40 per cent a year. During the moratorium period, your bank will continue to levy interest on your credit card. What’s more, any dues if not paid within the interest-free period, during the moratorium period, will also attract interest charges. This means that after the moratorium period, your June month statement will include all previous outstanding amount, principal amount on transactions done during the moratorium period and interest on these transactions.

Hence use the moratorium options across all your loans very sparingly. What may appear a free ride now could burn a hole in your pocket later.

 

Published on April 02, 2020

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