Three-Month Loan Moratorium: Not a Waiver, May Not Benefit All Borrowers Opposed to prima facie benefits of the three-month loan moratorium announced by the RBI, finer details reveal its a costly proposition

The Reserve Bank of India (RBI) on 27 March announced a slew of fiscal measures to fight the economic fallout of coronavirus or covid-19 virus.

In one of the measures, what is being hailed as a major relief to borrowers, all banks and non-banking lenders have been permitted to allow a three month moratorium on term and working capital loans. Term loans include all types of retail loans—home, car, personal, education, gold—as well as credit card bill payment. To top it up, the central bank has assured that availing this moratorium will not lead to downgrade in the borrower's credit score or affect the risk classification of the loan.

Essentially, borrowers, both retail and businesses, will have the option to not pay loan EMIs for the next three months, starting 1 March, without having to worry about the lender slapping a penalty on payment default or their credit score being downgraded.

Industry experts have unanimously welcomed the move. "Moratorium will cover everyone, from retail borrowers to small and big entrepreneurs. Considering the present uncertain situation, RBI has supported all stakeholders of the economy," says Jaikishan Parmar, senior equity research analyst, Angel Broking.

On the flip side, this move is expected to impact lenders, say experts. "Though, there is no other possible solution visible under the effect of Covid-19, moratorium on term loans may have an adverse impact on the cash flow levels of banks and small NBFCs," says Bhavin Patel, CEO and Founder, LenDenClub, a P2P lending platform.

Loan Repayment Deferred Not Waived

Take note that the moratorium is not to be misconstrued as a loan waiver or payment holiday of three months. Interest rate on the skipped installments will be accrued and added to the outstanding principle.

Kunal Varma, chief business officer and co-founder, MoneyTap says the moratorium doesn't come for free to consumers. "Interest will get accrued during this period, which the customers will need to pay along with their resumed payments from June onwards. That's a small price to pay for getting this immediate relief," he says.

Essentially, it is just loan payment deferment to ease the burden of EMI payments on borrowers whose incomes might have been disrupted due to the countrywide lockdown, ending on 14 April. "The moratorium/deferment is being provided specifically to enable the borrowers to tide over the economic fallout from COVID-19," said the RBI.

The Devil is in Details

Further, it is not a blanket benefit that will be passed to all borrowers. Instead, the decision to allow the three-month moratorium window will lie with individual banks. "Lending institutions shall frame board approved policies for providing the above-mentioned (loan payment deferment) reliefs to all eligible borrowers," the RBI stated.

Additionally, there is no clarity on whether a bank will allow moratorium to all its borrowers or evaluate passing it on case to case basis. Entrepreneur India wrote to two banks seeking clarity on the finer details but did not get a response till the time of filing the story.

"For banks and NBFCs, there's a lot of work involved in implementing this. Starting with alignment of repayment schedules, accounting changes, provisioning schedule changes, reporting changes and all of that finally going through a board approval before implementing the policy on an urgent basis," says Varma.

Borrowers willing to avail the moratorium should approach their banks to check their eligibility. Also, the moratorium has been made effective from 1 March and will last till 31 May. So, effectively, borrowers will get a two-month relief, unless their installments for March have still not been paid. If March payment defaulted because of non-availability of funds in the bank account, it will be covered under moratorium period and no penalty will be charged.

Should You Opt For it?

Financial advisors say this is a relief for households whose income streams have been disrupted due to the lockdown. "This move will help those who may have lost their job, are facing a pay cut or small entrepreneurs whose incomes have stopped," says Rohit Shah, founder and CEO, Getting You Rich. "This will free up cash flows for possible medical or other emergencies."

However, borrowers whose incomes have not been disrupted or despite earning disruption can still manage to pay EMIs should not opt for moratorium to avoid making their loans costlier.

After skipping installments you will either have to extend your loan tenure by a couple of months or increase EMI amount (see table). Entrepreneur India's calculations show that the longer the loan tenure, the costlier it will get.

Shah says moratorium benefit is largely toothless for credit card payments. "Credit card issuers anyway allow payment of minimum amount due, which is typically 5 per cent. So, moratorium is no extraordinary relief for credit card user," he says.

Skipping credit card payment can be very costly as not only is the interest rate steep but it also compounds monthly until the full amount is repaid. "Credit card rate can balloon up to 42 per cent per annum, so cardholders must repay the full amount as soon as possible even if opting for the moratorium," says Renu Maheshwari, CEO and Principal Advisor, Finscholarz.

Additionally, Shah says that those opting for the moratorium should do so only to ensure liquidity for emergencies. "The money freed up by deferring loan repayment should not be used for investing, especially to buy stocks just because they are cheaper," he says.