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Hurray. EMI holiday for 3 months... Who said that ? Decoding the RBI notification in simple words

COVID 2019 has affected almost 200 countries now, geographically and economically its effect is wider than world war. Almost entire world is locked down and entire world is affected.


Government and Central banks across the world is observing severe economic crisis and announcing various stimulus packages and regulatory measures to save the economy and its people. Almost all the major economy has cut down policy rates.


Government of India has also announced social package to the tune of 1.7 Lacs crore by giving food security and direct cash transfer to poor and unemployed people.


To infuse the liquidity in the system and to avail relief to Corporates, SME’s and individual borrower, RBI has also announced COVID-19 regulatory package.


  1. Repo rate cut by 75 Bps to 4.4%

  2. CRR cut by 100 bps to 3% for next one year

  3. RBI has also given bank an option to offer moratorium upto 3 months to their client on various loan facilities

While first two measures will boost liquidity by 3.74 Lacs crore, third measure will help borrower to manage their cash flows for next 3 months amid coronavirus outbreak.


But many people has misconception about repayment, Many people and SME’s are understanding that they don’t need to pay EMI and credit card bill for next 3 months. In this blog i am explaining why you should pay off course if you have money.


LET’S DECODE THE RBI MORATORIUM- Notification- DOR.No.BP.BC.47/21.04.048/2019-20 dated 27 March 2020


As per the notification it has been understood that -

  • 3 months EMI moratorium is not by default

  • Your lender will send one mail/ communication for confirmation, if you want to avail the deferment benefit you can apply

  • If you have not applied for the same. Your EMI will get debited automatically


RBI notification wordings-

Impact on credit history of the borrower (CIBIL reporting)-


  • In the first para, RBI has stated that banks and lending institutions can permit moratorium for three months.

  • If at all your lending institution has permitted than- The rescheduling of payments, including interest, will not qualify as a default for credit report or for the purpose of CIBIL reporting.

  • If you have not applied for the moratorium AND not paid EMI on time your credit score will affect in such situation


For easing of working capital financing-

  • Because of pandemic, working capital of the SME’s and corporate will be stretched as there may be delay in recoveries from receivables and higher inventory days. RBI asks bank to consider higher working capital days and recalculate drawing power based on deal merit.


  • Similarly SMA reporting norms relaxed and deferred for three months. (No need to mention, If at all your lender has permitted the same)


Suggestion to borrower-

  • Even if your borrower permit three months moratorium, it is advisable to pay EMI and credit card bill on time.

  • CIBIL score is not the only criteria to assess loan eligibility. If you are planning new loan (in say next 6 months) you should not opt such deferred payment of ongoing loans.

  • This moratorium is to manage the cash flow and it’s not free, it will cost you with some extra interest. See illustration for better understanding.

When one should use this moratorium-

Use only if you are facing cash flow problems and additional cost of fund is more than interest rate. In any case i will not suggest you to defer credit card payment, It usually fetch more than 40% interest.


Conclusion-


  1. Bank has right but not the obligation to permit moratorium, so it’s not by default.

  2. It’s not waiver of EMI or interest. It is just to manage your cash flow.

  3. If you are getting salary on time, don’t be fool by not paying EMI and credit card bill on time

  4. Interest accrues monthly, if you are not paying for three months, you have to pay compounded interest.

  5. All the term loan facilities is auto debit by ECS or NACH they will hit on time, If money is in your account it will get debited automatically.

Illustration-

How compounded interest will be charged if you opt for moratorium-

  • As per above example your Rs. 1 Lacs loan will become 102064 after 3 months. You may ask your bank to pay accumulated interest after 3 months.

  • By default your loan term will be extended by three months e.g. If your last tenor ended on 1 April 2021 it will automatically extended by three months and now last EMI will be in July 2021, Please note you have to pay interest for the moratorium period.


However i will strongly suggest to not to delay credit card bill. It cost hepty interest cost of about 40% p.a.


Team Equialpha


For any queries you can reach out to us at gourav@equialpha.com

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©2019 by Equialpha Wealth Advisers