Should You Opt For The Moratorium On Your Loan Repayment?

The Reserve Bank of India’s move to allow banks and other financial institutions to offer a moratorium on repayment of all term loans will come as welcome relief for a large number of borrowers in light of the disruption caused by the novel coronavirus pandemic.

• The central bank today announced that lenders, such as banks or housing finance companies or NBFCs, would be permitted to allow to defer repayments for up to three three months.
• The loans covered include housing loans, car loans personal loans as well as credit card dues.
• The deferral would be decided upon by the bank based on its policies
• And, such a deferral would not qualify as a default, and would not affect the credit history of a borrower.

What this means is that the onus of rolling out a policy to offer the moratorium is on each financial institution and, therefore, can vary. Borrowers should contact their lender to find out the relevant policy and not assume that the relief is automatically available to them.

Another important point to note is that this is a deferral on the payment of your Equated Monthly Installment and not a payment holiday. Interest will continue to accrue on the unpaid portion of your loan over the three months of the moratorium.

India’s largest lender State Bank of India will apply the moratorium to all borrowers with term loans and a customer can choose whether to opt out of it and make payments, said Chairman Rajnish Kumar at a press conference today.

The measure announced today is part of a slew of steps taken by the central government and the RBI to support the economy and help it cope with the coronavirus pandemic. India, at present, is under a 21-day lockdown to curb the spread of the coronavirus, which has so far infected 724 people and has killed 17. All businesses, except essential goods and services, will remain shut during the period.

To Opt Or Not?

Financial planners BloombergQuint spoke with said individual borrowers who do not have large cash reserves set aside as an emergency corpus, or who don’t have absolute certainty about their income for the next three months, should opt for the moratorium.

“We don’t know how the pandemic is going to progress. So, while at this moment it looks like it is under control, it is only at this moment,” said Suresh Sadagopan, financial planner and founder of Ladder7 Financial Advisories. “It may be a good idea for most people to avail the moratorium that the RBI has allowed, and later on we can always take that call. Suppose one-two months down the line, we see that normalcy is returning and the cash flows are starting to come in, when the situation normalises then we can start paying the EMI.”

Sadagopan said this advice would not apply to those that have a significant amount of liquidity or investments that can be liquidated at very short notice. Also, individuals who have secure jobs, like those employed by the government or by organisations that have gone on record to say that their employees will not lose their jobs.

Harshvardhan Roongta, financial planner and founder of Roongta Securities, concurs. “The point is very simple—if you don’t need to take an advantage, you shouldn’t take it. Let’s not burden the system unnecessarily. You should be a responsible citizen in that sense. This provision has been given for people who genuinely have a problem.”

Roongta and Arvind Rao, certified financial planner and founder of Arvind Rao & Associates, advise that individuals facing uncertainty should take advantage of the moratorium for a month and then take a call whether to extend the benefit based on how long the disruption lasts.

“Survival is the first requirement. At the moment you start with one month (deferment of EMI). If everything gets back to normal, it’s fine, but otherwise you should take advantage of three months,” Roongta said.

The funds that become available if you choose to opt for the moratorium should be parked in your bank account to supplement the availability of cash for the next three months, said Rohit Shah, chief executive officer of Getting You Rich. He stressed that it should not be used to make investments of any sort, particularly in equity.

In fact, Roongta said while traditionally he has advised his clients to invest in liquid debt funds for the purpose of maintaining a contingency fund, he is now advising them to shift a portion of this into their bank accounts to ensure easy availability of funds.