How to opt for 3 month bank EMI moratorium and should you really do it?

The Coronavirus outbreak and its seemingly unstoppable spread have shaken every part of the globe, including India. No one knows when the end of this virus will come and this has increased uncertainties manifold. Till a vaccine is not developed or some miracle happens, the situation is likely to stay tense for everyone.  As a proactive measure to contain the spread, the Government of India initially announced a lockdown of 21 days across the country till 14th April and further extended it till 3rd May. Between life and livelihood, the Government has rightly chosen the life of its citizens and changed the narrative to healthcare. Prolonged lockdown has paralyzed supply chain and heavily impacted economic activities and the economy as a whole. To allow some important requirements of the public to be fulfilled, government has announced resumption of many specified activities from 20th April in non-hotspot areas. This is likely to be gradual restart of economic activities.

Stoppage of economic activities has severely impacted cashflow in the hands of individuals, particularly those who are in small businesses, self-employed or working with Small and Medium Enterprises. Hence they are unable to pay back loan installments. Reserve Bank Of India  on 27th March, proactively announced a slew of measures, notably: infusing liquidity in the system  and permitting lenders to consider  moratorium for 3 EMI falling due from 1st March to 31st May. RBI again on 17th April announced the second set of important measures to support liquidity of NBFC/MFI and clarity on 3 months moratorium.  

The customer whose income is impacted and not able to service EMI must opt for moratorium allowed by RBI and lender will be happy to offer. This moratorium will safeguard bureau score and track record will remain same as it was as at 1st March. Customer can opt for moratorium by sending request to lender through SMS, e mail or through web site of company. Many lenders have specified date up to which request was required to be submitted but there is possibility many customers might have missed that date. However, customers may submit their request even now and pursue lenders to accept it. Lenders will definitely accept the request to protect the loan assets turning into NPA and will be happy to help the customer in the present situation. 

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The first and foremost pre-requisite is to clearly understand that this moratorium is simply postpone EMI to overcome cash flow impact and it is not a waiver. These deferred EMIs are to be paid back along with interest on the principal Amount. Interest will be worked out by lenders at applicable rate on deferred EMI and added back to arrive at revised principal on 1st June 20. There will be two options; one to keep existing EMI amount unchanged and increase remaining period of loan to recover the amount. The increase in period may be from 3 months to as much as over 30 months depending upon the applicable interest and left over period. Option 2 is to suitably increase the EMI amount without increasing remaining loan period or even increasing by 3 months only. This increase in EMI amount again depends on the rate of interest and remaining period. Longer the residual loan period, lower will be increase in EMI. The customer may choose either option. Following example will better clarify 

Mr. A has a home loan with the Bank, with the principal outstanding of Rs. 50 lakh and residual tenure of 180 months. He has decided to avail the moratorium facility to defer his EMIs that are due on April 01 and May 01, 2020. In this case, he will not get to pay EMI for the said period and upon the end of moratorium he will still have to pay 180 installments with interest of approx. Rs. 2,58,914, being added to his outstanding . Now he has to pay 180 installments for outstanding of 52.59 lakhs .

Should you opt for it?

However after taking moratorium, if cash flow improves, customer can prepay the deferred EMIs or more than that at any point without any penalty or charges. Customer can withdraw the option even before 31st May by paying deferred EMI with nominal interest for intervening period.

The moratorium allowed by RBI is to support customer and lender both. No point to seek moratorium, if cash flow is available to honor the EMI as per schedule. The people working in organized sector have no impact on cash flow unless their employer has imposed salary cut; Suggestion to all such people to keep payment on track without getting lured by moratorium which is temporary support only.

(By Deo Shankar Tripathi, Managing Director and CEO, Aadhar Housing Finance)