Availing moratorium may mean huge EMI burden later

After RBI’s announcement of the three-month moratorium for EMIs, bankers are advising borrowers not to avail it.

If you have taken any loan from a bank and thinking of availing the three-month moratorium as offered by your bank on the instruction of RBI in view of ongoing lockdown due to COVID-19, then please have a rethink.

The advice is being given by bankers themselves so as to help you to avoid huge interest payment in future.

Interacting with mediapersons immediately after taking over as MD, retail and digital banking at SBI, its MD, CS Setty, said that the moratorium scheme should be seen as a deferment and not as a waiver. Also, he clarified to the retail borrowers that if you have enough cash flow, then please do not avail the moratorium facility as any deferment of interest will entail interest cost. It speaks volumes of what does moratorium mean.

The RBI notification had said "the repayment schedule for such loans as also the residual tenure, will be shifted across the board by three months after the moratorium period. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period".

Deferred instalments under the moratorium will include principal and/or interest components, bullet repayments, EMIs, credit card dues, the RBI had said.

Look at what the RBI clarified: “The repayment schedule for such loans as also the residual tenure will be shifted across the board by three months after the moratorium period.”

Also, note that the interest amount shall continue to accrue on the outstanding portion of the term loans even during the moratorium period.

What this means is that there is no real waiver on loan repayments but only deferring the burden. Only that non-repayments in these three months - between March 01, 2020 and May 31, 2020 - will not amount to loan default. A borrower gets a breather for three months to arrange or accumulate money to pay banks once the relief period is over.

The good news is that all types of term loan borrowers can avail of this facility. The term loans include home loans, automobile loans, farm loans, retail loans and crop loans.

And yes, RBI has clarified that the installments will include credit card dues too.

Even state-run Bank of Baroda has said it is offering retail customers the option of getting a refund of the EMI that already has been deducted in March to meet any liquidity need during the disruption caused by COVID-19 pandemic.

Here lies the catch. Remember, this is only a temporary deferral and not a waiver of your loan installments. Nor is it a payment holiday.

The three-month suspension of EMI payments may not result in significant gains for borrowers as banks will charge interest for the moratorium period, according to the moratorium scheme announced by state-owned banks.

Rather it may be like a double whammy for the borrowers as on one side income has been hit due to the COVID-19 pandemic and on the other hand there is a threat of increased tenure if they opt for the RBI relief measure.

In a note to customers, the country's largest lender State Bank of India said "interest shall continue to accrue on the outstanding portion of the term loan during the moratorium period".

The accrued interest will be collected by the lender in the form of additional EMIs from those borrowers who opt for three months moratorium.

Explaining the financial burden with the help of an example, SBI explained that for a home loan of Rs 30 lakh with a remaining maturity of 15 years, the net additional interest would be around Rs 2.34 lakh equal to 8 EMIs for those borrowers who opt for the moratorium.

Similarly, it said, "for an auto loan of Rs 6 lakh with a remaining maturity of 54 months, the additional interest payable would be Rs 19,000 equal to additional 1.5 EMIs"

Releasing Frequently Asked Questions (FAQ), Indian Banks' Association (IBA) said that borrowers whose incomes have not been impacted should pay their EMIs in time.

"You may take the benefits under this (RBI) package if there is a disruption in your cash flows or there is loss of income. However, you must take into account that the interest on the loans, though not mandatorily payable immediately and gets postponed by 3 months, continues to accrue on your account and results in in higher cost," IBA said.

To give you a perspective, it said, "suppose your loan outstanding is Rs 1,00,000 and you are charged 12 per cent rate of interest on your loan, then every month you are liable to pay Rs 1,000 as interest. In case you opt not to service the interest every month, you are liable to pay interest at 12 per cent per annum, and accordingly you will pay Rs 3,030.10 at the end of the 3rd month".

Similarly, in case the interest rate is 10 per cent, you are required to pay Rs 833 per month, or Rs 2,521 after three months, it added.

With regard to credit card dues, IBA said, there is a requirement to pay a minimum amount and if it is not paid the same gets reported to Credit Bureaus but in view of the RBI circular, the overdues in the credit card account do not get reported to the credit bureaus for a period of three months.

"However, interest will be charged by the credit card issuer on unpaid amount. You should check from your card provider to arrive at interest payable. Although no penal interest will be charged during this period, but you must remember that the interest rate on credit card dues are normally much higher compared to normal bank credit and you should take a decision accordingly," it said.

This means that once the moratorium period ends, your loan tenure will get adjusted to your repayment, including the interest payment burden. In other words, the EMI burden only gets postponed for a while.

Most banks are giving an option for customers to apply for the three-EMI moratorium, or to ‘opt in’ (apply) for the scheme rather than ‘opt out’.

While SBI and other PSU banks are offering an automatic deferral option to customers, private banks are seeking an initial consent from the customer if he/she wants the deferral.

The RBI, in its circular, clearly states that the interest amount will get accrued on the loan outstanding even during the moratorium period.

This means the borrower will have to pay up the additional interest amount once the moratorium ends. According to bankers, this will reflect in the loan repayment schedule later. “It is not going to be three EMIs as against the three EMIs deferred. The customer may have to pay five or six EMIs additional depending upon the loan size and year of repayment cycle,” say bankers.

ICICI Bank, on its website says. “In case you choose to opt for a moratorium, then the applicable interest on the amount outstanding will continue to be charged during the period of moratorium. The payment schedule would be extended to recover the postponed instalments which will include the outstanding principal and interest.”

According to IDFC First Bank’s website, customers have to apply for the moratorium. “To apply for the moratorium, kindly write to us from your registered email address with your mobile number and loan account number and we will activate the moratorium for the unpaid EMI of March 2020 if any, and for EMI of April and May 2020,” the bank said.

Besides, IDFC First’s communication clearly specifies that interest will continue to accrue on the EMIs for which moratorium is provided at the same rate as contracted for the respective loan, and such interest will be collected as per applicable interest rate from the customer. “An updated loan repayment schedule will reach you by email, which can also be accessed on mobile app and website by end of the respective month,” IDFC First said.

When should a borrower opt for the moratorium?

The EMI deferral is not a benefit to any category of borrower since it is not a waiver or a payment holiday. It is only a relief for the distressed borrower who has lost income during the COVID-19 lockdown and does not have the money to pay their EMIs.

SBI’s approach of applying the moratorium without seeking customer’s consent may lead to unexpected burden for the customer when the additional interest payment finally reflects in their loan schedule post the moratorium period. This will be particularly true about customers who are not informed or aware about the interest payment part of the moratorium offer. Logically, this may lead to future disputes.

If you have enough cash flows to continue loan repayments, it is better to do that. This is because ultimately, the loan repayment burden, including the accrued interest component, will fall on you.

Banks and credit card companies may earn huge revenues from card users utilising the RBI moratorium and deferring their monthly card repayments by three months. With total card outstandings touching Rs 1,10,000 crore, banks stand to earn up to Rs 10,000 crore on accumulated interest charges for the three month period if all customers were to roll over their repayments.

The apex bank has permitted moratorium on repayment for three months, but it has not waived the interest charge for the three months. Normally, banks and card companies charge up to 42 per cent per annum interest rate on unpaid outstanding amount on credit cards.