EMI moratorium: No big gains for borrowers, banks to charge interest later

Three-month moratorium on EMI payments offered by banks is unlikely to bring much relief to borrowers hit by COVID-19 lockdowns as they will have to bear the extra cost of interest charged by lenders and a longer repayment period, according to experts.

Experts feel that the three-month moratorium on repayment on loans to help people fight the impact of coronavirus seems to be benefiting banks rather than borrowers as they will have to pay accumulated interest through increased number of EMIs.

It is an expensive proposition for any borrower to opt for three-month suspension as announced by the RBI under the relief measures to mitigate the hardship of those hit by the outbreak of COVID-19 pandemic.

 

Last Friday, the RBI had announced that all term loans, including retail and crop loans and working capital payments, will be covered by the three-month moratorium.

Banks will now have discretion in deciding the limits on working capital, with the RBI saying that no payment miss should be considered a default and reported to credit information companies.

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

SBI managing director C S Setty said it has two components- people who have term loans and the business units that have working capital loans.

"In the case of term loans, the RBI has clarified that the instalments, which includes principal as well as interest, where the instalments are falling due between March 1 and May 31, will be deferred for three months.

"So, in a term loan where the instalments are deferred and interest is also deferred means it is to be back ended. No point in again loading the term loan interest right away after three months, which customers would find it difficult," he said.

So, what SBI is doing is that these three monthly installments that are falling in this period, will be back ended at the end of the repayment period, he said, adding, any deferment of interest over such long period, if it is there, will entail additional costs because it is not interest waiver, it is interest deferment.

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

"We have been telling our customers through social media that if you have the ability and cash flow to pay, it makes sense to pay this amount to avoid the cost. But, the important thing is if you want additional cash flow, you avail this facility, and it costs you," he added.

In case of working capital, he said, three months interest will not be applied to the account but it will be applied immediately after the three months.

In a note to customers, SBI said, "Interest shall continue to accrue on the outstanding portion of the term loan during the moratorium period".

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

"For an auto loan of Rs 6 lakh with a remaining maturity of 54 months the additional interest payable would be Rs 19,000 approx 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 higher cost," IBA, an association of banks, 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 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.

Concerning 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 overdue 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, 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.

PNB Housing Finance said that there will be an increase in balance tenure by three months and a possible rise in EMIs for those customers opting for the moratorium.