The option of moratorium on EMIs and loan repayments, offered by the Reserve Bank of India as a means of relief for borrowers burdened by the economic decline is expected to be a non-starter. While the move was initially welcomed by banking experts and borrowers in the midst of the coronavirus pandemic, the guidelines issued by the RBI and banks reveal that the exercise of the option will attract interest on outstanding loans and pending repayments. In fact, most banks have advised borrowers not to opt for the moratorium provisions if borrowers are not facing disrupted cashflows.
Under this moratorium announced by the RBI on March 27, banks have the option to defer payments being made by its borrowers due between March 1 to May 31 - a period of three months.
This provision has been made to provide respite to borrowers and businesses who may face cashflow disruptions due to the ongoing three-week national lockdown currently scheduled to end on April 14. The moratorium will cover term loans and credit card repayments, and will be a moratorium on both the principal and interest components of monthly installments.
'Moratorium', Not Waiver
The moratorium is a deferment of loan repayments, and is not a waiver of these repayments.
"There is an unfortunate misconception that the moratorium is a waiver. It is not a waiver... It is essentially to take care of the cashflow mismatches because of the lockdown", said CS Setty, Managing Director of the State Bank of India in a interview to BOOM. "What the RBI has done is in respect of all term loans, the instalments and interest can be deferred", he added.
So then, what is the benefit for a borrower? Typically, borrowers unable to service debt or loan repayments would have an adverse impact on them through reporting of this non-payment to credit bureaus or attain classifications such as 'non-performing', or a special-mention account. None of this would apply to loan repayments during the moratorium period in case a borrower is unable to service debt.
"Suppose you don't pay an installment, it will be considered a default; and the default gets reported to CIBIL [credit rating agency] and the credit score gets impacted ... we are giving a moratorium during this period. That even if the customers are unable to pay, their credit scores will not get impacted and banks are not required to see whether it is a special mention account or a non-performing asset. These norms are not applicable", Setty elaborated. "The purpose of the moratorium is that you put additional cash in the hands of the people who require it."
...But here's the catch
While the moratorium will ensure the affected borrowers do not have to bear the burden of debt repayment for three months, and that too without facing any regulatory consequences, the RBI and banks have made it clear that interest shall continue to accrue on all outstanding amounts.
"Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period", says the RBI's official circular outlining the moratorium.
To illustrate, YES Bank in their official documentation has written:
"A customer with an EMI based loan having Principal outstanding of INR 15 lakh with a residual tenure of 15 years, would need to pay an approximate additional interest of INR 1.01 lakh [assuming ROI of 8%] i.e. approximately 11 additional EMIs (which will include the three EMIs pertaining to the moratorium) due to the three months moratorium."
ICICI Bank has given:
"Mr. ABC has a home loan with the Bank, with the principal outstanding of Rs. 50 lakh and residual tenure of 180 months. He has decided to avail the moratorium facility to defer his EMIs that are due on April 01 and May 01, 2020. In this case, his revised tenure would increase from 180 to 186 months to recover the additional accrued interest of Rs. 2,58,914, keeping the instalment amount unchanged."
Other banks have taken to illustrations too. Private lenders such Axis Bank have spelt out to their consumers what the moratorium would mean, and the interest carry forward in case consumers chose to opt for it.
This is why banks are advising their customers not to opt for the moratorium if their cashflows have not been disrupted due to COVID-19. "We are advising our customers that if you do have regular cashflows, and you don't want to pay this additional cost of interest which is going to be added, it is better to pay the EMI", cautioned Setty.
Do one need to opt-in, or does my bank provide the moratorium by default?
It depends on the bank, and on the line of credit being availed of.
For instance, ICICI Bank has divided their credit portfolio in two categories - 'A' and 'B'. All services under category 'A' - such as two-wheeler loans, tractor loans, cattle loans, gold and jewel loans - would be under the moratorium by default. Should a borrower under category 'A' want to keep paying, and opt out of the moratorium, he/she would be required to intimate the bank. Category 'B' products - covering products like personal loans, credit cards, home/land loans - are the opposite, and borrowers availing of them would have to intimate the bank in case they wanted opt into the moratorium. This can be read here.
SBI has offered the moratorium across the board by default. Should a borrower not want to opt for the moratorium, the borrower simply has to pay their installments. The same has been clarified on their website (SBI and SBI Cards). Another major private lender, HDFC Bank, has outlined similar provisions.
Again, depending on the bank, borrowers availing of multiple credit products (say a credit card and a personal loan, or a credit card and a housing loan) from the same bank may have the option to apply the provisions of the moratorium to all, either one or neither of these products.
Watch Setty's interview to BOOM here.