Earlier this year, on March 27th 2020, the Reserve Bank of India (RBI) announced a moratorium on retail terms loans to give those whose finances had been impacted as a result of the COVID-19 pandemic some time repay their loans. On May 22nd, just over a week ago, the RBI extended this moratorium by another three months, effectively having allowed a moratorium period of six months.
Before you breathe a sigh of relief, it might be better to take a couple of minutes and weigh out this situation. To that end, here are 6 things you should consider carefully if you’re thinking about availing Moratorium 2.0
1. Short-term access to credit: Financial institutions, especially banks, are notorious for exercising extra caution at the best times and this is not the best of times. Most lenders are likely to practice restraint in the near future. Many will be unlikely to lend EMI-based credit to the borrowers who have availed the moratorium, while the few who did are likely to follow certain precautions if they do.
2. Business loans may not be accessible: Small business owners who already opted for the moratorium due to the uncertainty of the lockdown period, or would like to avail the moratorium this time around, you may not be able to take a business loan for the next 3-12 months. Market experts agree that most banks will not lend such loans because,
- They will work on the premise that they can’t issue a long term loan for a business that couldn’t handle the financial burden of a 2-month lockdown
- They’re not sure of your capabilities to pay your EMIs after the moratorium ends.
It may seem unfair and it certainly will feel like it makes no sense, especially since the RBI backed this moratorium and you probably only availed it (or want to) because you really couldn’t afford your EMIs or were being careful because of how unpredictable everything has been. However, banks value stability and will most likely insulate themselves from any risk in case partial lockdowns return or COVID-19 sticks around longer than any of us have planned.
3. Certain other loans will be off-limits too: According to industry experts, for the reasons mentioned above, banks will try to protect themselves from risk even more than usual. This would definitely have an impact on retail loans like personal loans, new home loans, unsecured business loans, home loan top-ups and loans against property, just to name a few.
4. Your credit score: A lot of people were confused about this the first time around so allow us to reiterate that there will be zero effect on your credit score if you continue to be opted-in for the moratorium. There will be no negative reporting to CIBIL and you will not be classified as a Non-Performing Asset either (NPA). That being said, however, it is the faintest silver lining to the moratorium since it comes at a hefty cost. We highly recommend that you continue to pay your loans regularly.
5. What this moratorium actually is: We went over the implications of the moratorium when it was first announced but it doesn’t hurt to go over them again. Relaxation of the status quo always comes at a cost and the moratorium is no different. It is merely a tool provided by the RBI to help those who are severely impacted by the pandemic so they can manage their cash flow and avoid defaulting on their loan payments.
Whether you availed the first moratorium, or want to avail the second, you will essentially not be paying EMIs for 3-6 months. As per RBI guidelines, interest will continue to accrue during this period and this accrued interest can be burdensome. This was a big reason why many customers, despite having suffered some financial impact, continued to make their payments towards their loans.
6. You may have other options: There may be other options besides the moratorium that might be worth looking into. For example, the Union Cabinet of India itself announced an Emergency Credit Line Guarantee Scheme (ECLGS) to provide funding to MSMEs that have availed a working capital loan or a term loan for business.
Many lenders and financial institutions are even offering options to change the structure of your payments to help you avoid the extra financial burden that accrued interest built up over the moratorium period can turn out to be. If you think you might have trouble making your payments or continuing to do so, double-check with whichever bank, financial institution or lender you have borrowed from to explore every option they have to offer to restructure your loan.
On a closing note, here are a few thoughts we have on the matter. This is a difficult time, one of the most challenging times we have ever faced as a country, and everyone, including the RBI, wants to see us come out of it. It is only natural to provide reasonable options to those who are struggling, though we still believe that taking on the additional burden of the interest charged during the moratorium might be too much for many people.
No one knows your financial situation better than you: the more informed you are about how you will be impacted tomorrow by the financial decisions you make today, the more empowered you will be to make the right decision for you.