RBI’s 3 Month Loan EMI Moratorium: Should you Opt for it?

Note – Initial 3-month moratorium has been increased by 3 more months. Now moratorium is from March 2020 to August 2020. Read here about 3-month moratorium extension (June to August 2020).

To provide relief to the borrowers who are facing possible disruption of income due to coronavirus-triggered nation wide lockdowns and its spillover effects on the economy), the RBI has announced 3 Month Moratorium for borrowers.

And more specifically, this moratorium will apply for loan installments EMIs falling between 1st March 2020, and 31st May 2020.

Actually, it has allowed banks and other financial institutions to permit moratorium on three months on payment of instalments. But the final decision to allow the moratorium is up to individual lenders. Most probably, all of them will agree to it and offer the moratorium to eligible borrowers.

So what exactly does the Loan Moratorium mean?

The moratorium is a period during which borrowers don’t need to pay EMIs. To put it very simply, this is a deferment of loan repayment by 3 months. So for example, your loan was originally scheduled to end in the next 27 months, then you can choose to take a 3-month deferment. As a result, the loan would then end in 27+3 months.

And this moratorium is available for all eligible borrowers of all types of term loan like home loans, automobile loans, retail loans, etc. There was some confusion initially but RBI has clarified that it will also include credit card dues (but if you can, then avoid delaying credit card payments as it can lead to falling into a debt spiral. Do give some time to read how credit card interest is calculated?).

How does this impact your credit history? Generally, non-payment of dues above 90 days is classified as a non-performing asset (NPA). So what if you don’t pay EMIs during the 3 month period? It will be more than 90 days? As per RBI’s announcement, if you don’t pay your EMIs in these 3 months, banks won’t term your account an NPA. That is, there will be no negative impact on your credit score (CIBIL Score).

But here is something important to understand – this moratorium comes at a cost. Agreed that there won’t be any penal interest or bad entry in your credit history. But the interest for the period of the 3-month moratorium will still be added to the principal. So once the moratorium is over, you will have to pay the outstanding amount, which will also include the interest levied during the 3 months of the moratorium.

So basically, this is only a temporary deferral and not a waiver of your loan installments. Once the moratorium ends, your loan tenure will get adjusted forward by 3 months, including the interest burden. So the EMI burden only gets postponed for a while and this is in no way a waiver of 3 months EMI. Do not get confused about this.

All said and done, Should you opt for this 3-month moratorium?

• If you have sufficient cashflows to continue EMI payments, then you should continue paying your regular EMIs. Because ultimately, this is not a waiver just a deferment. So eventually, the loan burden and accrued interest component will fall back on you.
• But if you genuinely feel that your cashflows will be impacted due to this Covid-19 lockdown or its aftermath, then you can use this 3 months of additional time to manage your payments without any penalty, pressure or negative impact on credit score.

I was planning to do a further detailed writeup on this. But I came across a very useful twitter thread by Manoj Nagpal (link). Since it had a list of Q&As, I decided not to reinvent the wheel and took permission from Manoj to replicate his FAQs here.

So here are few of the questions and answers from this thread here.

Q – What did RBI say?

A – For any kind of loan, your Bank/NBFC can give you a grace period of 3 months for your EMIs / payments i.e. from 1st March 2020 to 31st May 2020.

Q – What it is NOT?

A – It is not a waiver of PRINCIPAL OR INTEREST for 3 months. It is just a grace period.

Q – Explain to me the difference between the Grace Period and WAIVER?

A – The Grace Period means that if you cannot pay your EMI/Loan repayment in this period, the bank will i) Not come after you or charge PENALTY, ii) They will NOT call you a defaulter. But For this period, normal interest will still be calculated and accrue to you. So this is Grace Period for whatever you were supposed to pay. Your loan tenor will increase by approximately 3 months and you will not bear any PENALTY.

Q – Why is this NOT a WAIVER?

A – Remember, this is NOT a Waiver of interest or Principal. You still have to pay all your dues. Not only that even interest for this period will be charged.

Q: Do I have to apply to the Bank for this benefit?

A – No. All Bank Boards will put in a policy and it will be applicable automatically for all the loan holders

Q – Do all Banks have to offer this or some banks may or may not offer this

A – Technically RBI has given an option. But very clearly they expect all Banks to offer this facility. Every Bank may have a slightly different operating process

Q – If I don’t pay EMIs in the period, Will I have to pay all together at the end of this 3 month period?

A – No. Only your loan tenor will be extended by 3 months. Also, your EMI will remain the same and only the loan tenor will increase proportionately.

Q – If I don’t pay during this period, will it affect my credit score (CIBIL score)?

A – No, your credit score will not be impacted as you will not be treated as a defaulter by the Bank for payments due during this period. Hence the banks will not report this to CIBIL.

Q – If I have money in my bank account and my EMI is due, then won’t the bank debit it during this period if it is in ECS?

A – The bank will try to debit your account as normal or on the usual due date. If the money is there in the account, it will be debited.

Q – Will the bank ask me for any documentary proof that I am not able to pay my EMI?

A – Each Bank will announce its own process. And some banks may ask for it. But mostly, it seems that most banks won’t have that requirement.

Q – If I can make my normal EMI payments during this 3-month period, should I continue as it is?

A – Yes, please continue to pay, if you can. And no extra action is required from you. This 3-month moratorium should be utilized only by those who have problems of liquidity in this period.