Personal Finance

RBI’s moratorium on retail loans: How it works

Radhika Merwin | Updated on March 29, 2020

Borrowers gain from rate cut, but think twice before claiming the moratorium

The RBI has come out with a slew of measures to tackle the impact of Covid-19 on the economy. A sharp cut of 75 bps in repo rate to 4.4 per cent, a series of liquidity measures and a moratorium on term loans — all will have an impact on borrowers and depositors in the coming months.

Moratorium relief

In a bid to ease the pain of banks and borrowers, the RBI has provided a three-month moratorium on payment of instalments on terms loans (outstanding as on March 1). Payment of all instalments — principal and/or interest components, bullet repayments, Equated Monthly Instalments and credit card dues — falling due between March 1, 2020, and May 31, 2020 -- will be eligible for the relief.

This means that you can opt for a three-month relief on your loan repayments to ease the strain on your finances.

But there are several things to keep in mind.

One, EMIs are normally executed through banks’ auto debit facility. With the month coming to an end (and most EMI payments usually set for the beginning of the month), your EMI for March may already have been debited from your account. If you wish to claim the RBI relief, you may contact your bank to reverse the auto-debit transaction.

If you have taken a loan from an NBFC or an HFC, the reversal may be time-consuming. Remember, since the lockdown imposes restrictions on branch activities, communication through call centres and over the phone with your bank officials may be challenging.

For the coming months (April and May), in all likelihood, your bank may send you mail or SMS and ask if you want to opt in or out of the moratorium. If you choose to take the respite, your upcoming auto-debit facilities will be halted.

Should you go for it?

Remember that interest on the loan will continue to accrue even during the moratorium period. Hence, take the moratorium option only if you are crunched for funds, for exorbitant rates on credit cards and personal loans can pinch you. Also, if you are nearing the end of the loan tenure, it may not make sense for you to opt for the moratorium.

However, if you choose to claim the relief, your credit score will not be impacted, according to the RBI notification. You may, however, have to re-compute the tax liability for year ending March 2020 and pay the difference in tax on the amount reversed (on payment made already in March). For example, this could be the case if you have claimed tax benefit on a home loan instalment paid in March.

Borrowers to gain

The RBI’s rate reduction will result in a substantial cut in lending rates by banks. Banks had introduced repo-linked loans from October last year.

Borrowers whose loans are linked to repo will see the reduction in repo passed on to them in the coming months. (The RBI has mandated that loans be reset at least once in three months).

SBI has already announced a 75 basis point reduction in its external benchmark-linked lending rate and repo-linked lending rate, with effect from April 1. Other banks are also likely to follow suit.

This implies a notable reduction in your EMIs.

For old borrowers (pre-MCLR (marginal cost of funds-based lending rate) regime or pre-repo-linked loans), a fall in lending rates would depend on each banks’ action. One-year MCLR has fallen by about 50 bps since January 2019 (even as the RBI cut repo rate by 135 bps in 2019). While the pace and quantum of transmission will depend on each bank, several liquidity measures (CRR (cash reserve ratio) cut and MSF (marginal standing facility) tweaks) undertaken by the RBI will lead to faster reduction in deposit rates and hence banks’ cost of funds. This could lead to sizeable cuts in MCLR in the coming month.

Many banks, flush with liquidity, may offer attractive deals to borrowers. But it is important to exercise caution.

With the ramifications of Covid-19 on jobs and incomes uncertain, borrowers should not over-leverage, and only go for loans on a need basis.

Depositors’ woes

Sharp cuts in deposit rates have pinched depositors in the past year. Since January 2019, fixed-deposit rates have moved lowered by as much as 75-100 bps in certain tenures.

The RBI’s steep reduction in repo rate and liquidity measures will prompt banks to cut deposit rates substantially.

SBI has already announced cuts in retail term deposits by 20-50 bps across tenures with effect from March 28.

Published on March 28, 2020

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