3 Month Extension of Loan Moratorium (6 Months: March to August 2020)

RBI has extended the loan EMI moratorium by another 3 months. That is, it is now applicable up to 31st August 2020.

So with this extension, the total loan moratorium due to Covid19 in India is now 6 months. And this means that the borrowers (if they opt for) don’t have to pay the loan EMI during the moratorium period of 3+3=6 months.

The original 3-month loan moratorium was of 3 months between 1st March 2020 and 31st May 2020. And with the extension, it covers another 3-month period between 1st June 2020 to 31st August 2020. So the overall 6-month moratorium period is from 1st March 2020 to 31st August 2020.

This extension was an expected move given that lockdown in India too was extended several times after RBI’s original announcement of the 3-month moratorium. The revenue and income of many Indians won’t kick start immediately after the gradual easing of lockdown. Right? So chances were that many individuals would be unable to service their debt in these tough circumstances even after the first 3-month moratorium ended. So the additional 3-month extension provides more breathing space to the borrowers. Now the loan EMI payments will restart only once the moratorium time period of 3+3 months expires on 31st August 2020 (or later if the moratorium is further extended later on).

By the way, if you are not sure about what exactly does the Loan Moratorium mean, then here is a short explainer – 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 14 months, then you can choose to take a 3-month deferment. As a result, the loan would then end in 14+3 months.

And this moratorium is also applicable on all types of term loan like home loans, personal loans, automobile loans, retail loans, etc. It is also applicable on credit cards like 3-month moratorium for credit cards.

Also, please don’t forget that this moratorium comes at a cost. The interest for the period of the 6-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 6 months of the moratorium. So this is only a temporary deferral and not a waiver of your loan installments (or credit card dues). Once the moratorium ends, your loan tenure will get adjusted forward by 6+ months, including the interest burden. So the EMI burden only gets postponed for a while and this is in no way a waiver of 6 months EMI. Do not get confused about this.

And like the initial 3-month moratorium, even the extension doesn’t impact your credit history. So if you don’t pay your EMIs in these 3+3= 6 months, lenders won’t categorize your account an NPA. That is, there will be no negative impact on your credit history.

A reminder for credit card users considering the moratorium or its extension. If you know how credit card interest is calculated, you will realize that once you opt for and enter the moratorium period (3 + 3 = 6 months), your each subsequent purchase using your credit card will have no interest free period! The interest on each of the following transactions will be charged from the very first day itself. That’s how credit cards work and that is the reason why it’s always better to pay your credit card bills in full on time and that is the very reason I have said this earlier why paying minimum due on credit cards is a bad idea.

Should you opt for this 3 + 3 months extension of the moratorium?

My advice remains the same as the last time:

• If you have sufficient cashflows to continue EMI payments, then you should continue paying your regular EMIs. Because ultimately, this is not a waiver of EMI or interest but just a deferment. So eventually, the loan burden and accrued interest component will fall back on you. With an extension of 3 months, the total interest accrued will now be of 6 months. Hence, more burden for borrowers.
• If your cashflows are / will be impacted due to this Covid-19 lockdown or its aftermath, then you can use this additional 3 months of time to manage your payments without any penalty, pressure or negative impact on credit score.
• I still urge you to keep some money for emergencies (in proper a emergency fund). And I know this might sound bad to hear, but this type of crisis is what shows how important emergency fund is.

That was from the borrower’s side. But what about from the lenders side? Are the risks increasing for banks with the extension of lockdown and moratorium?

Yes.

If more and more people opt for the loan moratorium, it means that their cashflows are stressed. And that’s not a good sign. And with this new extension of 3 more months of moratorium, it raises more questions. No doubt intent is right to ease the pain for borrowers. But think of it. This also means that once the moratorium of 6 months is over eventually in August 2020, these borrowers will suddenly have to arrange fund to restart the EMIs and additional interest of last 6 months!. It won’t be easy for many depending on who is impacted how much by the business shutdowns and disruption in incomes. So it’s possible that some lenders may see deterioration in repayment profile of the borrowers at an aggregate level. And as the dues become larger, you never know that some borrowers may get cold feet about repayment itself and may consider defaulting by choice. We cannot be sure. But generally, retail loans are given to decent individuals who usually don’t default by choice. And they also want to keep their credit scores good so that they can borrow more in future. So this extension of the moratorium will be an interesting space to watch from the credit behaviour perspective.

That is all about the Reserve Bank of India’s of EMI moratorium by 3 more months, i.e., June, July and August, 2020. The earlier deadline of 3-month EMI moratorium was till 31 May 2020. So now, it’s a total of 6 months of EMI moratorium.