March 28, 2020

3 Months EMI Moratorium on loans – Don’t opt

Yesterday RBI announced 3 months EMI Moratorium on loans. People rejoiced and there was a big relief on many thinking they are now safe for the next 3 months. However, the reality is entirely different.

What is the meaning of 3 Months Moratorium?

As per the definition of the dictionary, Moratorium means “A legal authorization to debtors to POSTPONE the payment.”. You are just allowed to postpone your EMI for 3 months but your EMIs were NOT WAIVED OFF.

Due to the 21 days lockdown across the country, many businesses are suffering. Hence, to give a breather for loan repayment for retail borrowers, RBI announced this 3 months moratorium.

If due to financial problems during these three months, you are unable to pay the EMI, then such non-repayment is not considered as DEFAULT.

3 Months EMI Moratorium on loans – What it is actually?

Let us now understand the 3 months EMI

# Banks which are eligible for providing 3 months EMI Moratorium

All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) (“lending institutions”) are permitted to grant a moratorium of three months on payment of all installments.

# It is not WAIVER but DEFERING

Many thought that it is a waiver of your EMI for the next 3 months from Government. However, it is just deferring your EMIs. Hence, you can’t run away from this 3 months EMI.

# Types of loans eligible under 3 months EMI moratorium

Term loans, including agriculture term loans and crop loans besides retail loans, are part of this moratorium.

Retail loans are typically home loans, personal loans, education loans, auto and any loans that have a fixed tenure. They also include consumer durable loans, such as EMIs on mobiles, fridge, TV etc.

# Credit card payments are also part of this 3 months EMI moratorium

Earlier there was a confusion on whether the credit card payments are also the part of 3 months EMI moratorium or not. However, later RBI cleared this doubt and such credit card payments are also now pat of this 3 months EMI moratorium.

# Your loan tenure will increase by 3 months

If you opted the 3 months EMI moratorium, your loan tenure will increase by 3 months. Suppose your loan tenure is 20 years, then now the loan tenure is 20 years and 3 months.

# Only RETAIL loans are covered but not BUSINESS loans

This 3 months EMI moratorium covers only retail loans but not any business loans.

# Eligibility EMIS Moratorium

EMIs due between 1st March 2020 to 31st May 2020 are eligible for such moratorium.

# It is not a DEFAULT option but you have to approach the bank to avail this moratorium

Banks may provide this moratorium on their own. However, as of now, it is clear this it is not a default option on all EMIs. You as a borrower have to approach the bank and opt for this moratorium by mentioning the reasons of difficulty in paying the EMI.

However, considering the severity, I think banks will not look for reasons but provide this moratorium to all those who wish to opt.

However, as of now, RBI is clear in this regard with this sentence ” accounts provided relief under these instructions shall be subject to subsequent supervisory review with regard to their justifiability on account of the economic fallout from COVID-19.”.

# Impact on Credit Score

As this is considered as a deferment than the default, such moratorium will not affect your credit score. Hence, no need to worry on credit score front.

3 Months EMI Moratorium on loans – Don’t opt

Why I am outrightly saying that NOT TO OPT this 3 months EMI moratorium on loans? The reasons are as below. The biggest reason for saying DON”T OPT is the below lines from RBI notification.

3 Months EMI Moratorium on loans

# It is not a WAIVER but a DEFER

As I mentioned above, RBI not waiving your 3 months EMI. However, provided you an option to defer it. Hence, no such benefit for all of you. You are just deferring your EMI.

If your loan tenure is 120 months, then it will increase to 123 months.

# You pay HIGHER interest

Assume that you have Rs.30 lakh loan with 8% interest. Assume you opted for this 3 months EMI moratorium, then during such moratorium period, banks will calculate the interest on this outstanding Rs.30 lakh at 8% and the monthly interest of Rs.20,000 (Rs.30,00,000*8%/12).

Hence, if you opted for this 3 months moratorium, you have to additionally pay Rs.20,000 interest on your outstanding just because you deferred your EMI.

However, as of now, it is not clear how you have to pay this interest. I think they will adjust to your EMI and your EMI may slightly get increased.

Hence, this is nothing but deferring your credit card payment dues for 3 months 🙂

# It is only available for those whose income affected due to Coronavirus

All are not eligible to avail this 3 months moratorium. If your salary or income affected due to this Coronavirus outbreak, then you have to approach the bank and convince the reality. Based on that only banks can offer you such moratorium.

However, I feel that considering the impact of Coronavirus on all of us, banks may provide this to all who approach the bank. But remember, it cost you more.

Conclusion:-It is clear now that there is no point in opting for this moratorium. If your income is intact or you have sufficient emergency fund placed to face such a situation, it is far better to let the EMI continues than opting for EMI moratorium.

In the end, banks are not under loss by providing this moratorium but you will be under loss by opting this.

IF YOUR INCOME IS INTACT OR YOU HAVE SUFFICIENT EMERGENCY FUND PLACED TO COVER INCOME LOSS, THEN DON’T OPT FOR THIS 3 MONTHS EMI MORATORIUM. LET YOUR EMI CONTINUE…

33 Comments

  1. Sir, I have made an agreement with a buyer to sell my house. He is going to pay me full amount in 3 months and the same I will use for closing my loan account. Till this 3 months he is also going to pay me the emi amount.
    Now my question is should I keep paying the emi or should I opt for moratorium for 3 months and keep the emi amount that he will give me, and close the loan after 3 months.

    Reply
    • Dear Puneet,
      It is better you opt for regular EMI to continue than opting for the Moratorium.

      Reply
  2. Dear Basu Ji
    Thanks a lot for dispelling the confusion. Now we can take an informed decision .

    Reply
  3. The situation outside is critical. Is there any other way to go to bank raise this request? Is it compulsary or optionalto raise the request.

    Reply
    • Dear Srinivas,
      You can approach the bank branch either through email or call. Otherwise, approach your relationship manager for the same. You no need to go personally to visit. It is optional to choose from.

      Reply
      • SBI is making moratorium mandatory so I want to understand will it have any effect on end user who is capable of paying the EMIs
        According to my understanding, interest of 3 month will be accrued and there are 3 possibilities

        1. Banks can ask for the same in 4th month along with 4th month standard EMI in this option tenure will not be extended as interest is already paid
        2. it will get adjusted to future EMIs and end user will pay higher EMIs however tenure will not be extended
        3. loan tenure will be extended by keeping the EMI same as before

        In any of the 3 options, will a customer end up paying more to bank due to this moratorium is my question?

        Reply
        • Dear Vinay,
          Never opt for this MANDATORY. You have every right to reject and go for regular EMI. Regarding the options, you have visualized, in all, you will end up in paying more. In some, you are paying now and in others, you are deferring.

          Reply
          • Hi Sir,

            But in SBI they said that by default for the all the loans moratorium has been applied. How to approach the bank not to accept moratorium. Because this will increase my interest burden.

            Reply
            • Dear Mani,
              They can provide this facility to all borrowers but can’t FORCE to accept it. Approach the branch through email or call.

              Reply
              • Dear Basu,

                The concerns raised are quite valid here. I myself has approached SBI through mail and called their relationship managers but in both cases I did not get any response.

                Now assuming that they are forcing this on customer and my home loan EMI is say 30000 Per month which get automatically deducted from my account. Can I pay the EMI amount proactively to the loan account, to reduce the hassle here? In other words, will me crediting the EMI amount from my end to loan account do any good in terms of avoiding the additional interest that I have to pay due to moratorium?

                Regards
                Ayas

                Reply
                • Dear Ayas,
                  Yes, at first wait for auto deduction. If it not happen, then pay it on your own rather than waiting for their communication.

                  Reply
                  • Thank you Basu for your prompt response.

                    The only other thing that comes to my mind that, EMI that I will proactively pay for next 3 months may not be treated as a EMI. Rather they may treat it as a one time payment I am making to reduce my principal loan amount 🙂

                    Regards
                    Ayas

                    Reply
                    • Dear Ayas,
                      If they treat it as towards principal, then also fine. The reason is that the interest calculation for that much amount will get reduced. Which is far better than opting this option. However, you better communicate with the Bank and confirm that it is EMI.

    • In the post you have mentioned that
      “This 3 months EMI moratorium covers only retail loans but not any business loans.”
      Well, let me make this clear that the moratorium is for all Fund Based Faculty for individuals and non-individuals.
      The moratorium is available for Retail, MSME, and Agriculture loans (All types like EMI, NON-EMI, LIMITS AND OVERDRAFT)

      Reply
      • Dear Mayur,
        This is for individual loans but not for business loans.

        Reply
  4. Thank you sir for the detailed information. I was also skeptical about the interest calculation part.

    Reply
  5. Dear Sir,

    I have hdfc bank credit card facility past 20 years and there has been no default on payments to date. My question now is, coming month cycle by 25th every month my payment due. My capital has been eroded due to this coronavirus, in trades and balance is nil. Can I take the benefit of this 3 months moratorium, if so what all advantages?

    2). Currently, my vehicle loan is in SBI Bank, which I have taken for a period of 7 years. This is my fifth year running. EMI is Rs.6,100, debited from my account. Can I place a request to the bank of availing 3 months moratorium? Please suggest.

    Reply
    • Dear Rao,
      As I pointed, if you are capable of paying, then better to pay than finding the reasons of NOT TO PAY. This moratorium is not FREE.

      Reply
    • Dear Sir,

      I appreciate your genuine response, will make some arrangements for paying as per the schedule.

      Thanks, and do keep up the good work.

      Reply
  6. Is it applicable for Overdraft loan taken from bank for business purpose. My brother had taken OD loan from his bank for his small business. Now Is it possible for him to opt this .

    Reply
    • Dear Kalai,
      I have already cleared that this facility is not applicable to business loans.

      Reply
  7. Hello Mr. Basavaraj,
    been a follower of your blog for a few years now. Always appreciate you jumping on new subjects and among the first to write about its impact in layman language. Also your clear prescriptive advise is indeed very helpful in the mist of so much misselling these days. Thank you.
    Regards

    Reply
  8. Really thank you for the clarification

    Reply
  9. If i opt moratorium for 3 month, save all EMI and repayment to bank as a principle. Its really benifict?

    Reply
    • Dear Kannan,
      How much you earn during these 3 months? Whether your return is more than the interest rate charged on your loan? Don’t take this step and especially when everything is VOLATILE.

      Reply
      • Thank you sir

        Reply
      • Hi Basu Sir,

        My query is if I postpone credit card payment, would huge interest rates of credit card get applied to my account after 3 months?

        I recently made a transaction of 2 lakhs and want to know if I will end up paying 2 lakhs plus huge interest rates after 3 months?

        Thank you

        Reply
        • Dear Nithin,
          “My query is if I postpone credit card payment, would huge interest rates of credit card get applied to my account after 3 months?”-YES.
          Better to pay it rather than opting for Moratorium. Use moratorium only in worst case.

          Reply

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