STOP – Should you use the EMI Holiday?

RBI Announcement for CoVID19; Impact for borrowers 

A 3-month moratorium for borrowers of all kinds.

• Lending institutions are “permitted” to grant a moratorium on installments between March 1, 2020, and May 31, 2020.
• All banks/lending institutions are covered in this scheme and all types are payments are covered – unsecured / Agri loans/retail/ working capital loans include credit cards.
• This is ONLY a postponement of EMIs/Interest and NOT waiving of EMIs/interest.
• Interest would get accumulated for the period and added to the principal outstanding.  This means you need to pay additional interest during the course of the loan. There is no penal interest or adverse impact on credit rating/score.
• You can check the applicability and procedures with your financial institution.

While the above decision from the RBI has been a welcome relief to people with temporary cash flow issues faced by many borrowers, this article helps you evaluate whether to avail of the moratorium.

Who is it meant for?

This is meant primarily for individuals and businesses impacted by the economic fallouts from COVID-19.  The lending institution may need to be satisfied that the deferral is necessitated on account of the fallout from COVID-19.  This would be useful for affected businesses and salaried employees working in Aviation, Retail, F&B, Contracting, Travel/Leisure, and other high adverse impact sectors. However, it is not restricted to any sector.  One can opt for this measure if one would like to create a small buffer to tide over what might be a slightly long draw battle for these sectors to get back to normalcy. Those unaffected need not avail of this option since interest continues to be charged during the moratorium period. This will only extend the tenure of your loan.

Use early repayment if possible

A practical approach for you-

• Must Avoid: If your interest rate is very high (eg. Credit Card outstanding), one should avoid availing of the deferral of payment.
• Those whose salaries/business cash flows are impacted and are extremely stressed on their finances should avail of this benefit in toto. Take this break to put things in order, rack up some liquidity to tide over the current situation; and work out a plan on how you will service these loans from June 2020. The opportunity is God sent for this category and should be availed.
• Those who are tight on their finances and uncertain about their business recovery/ salary impact can also avail of this moratorium period. However, they can do two things
  • First, create a buffer of 2-3 months basis this savings in EMI paid out to help tide over the immediate liquidity situation.
  • Payback part of the whole of deferred installments post the moratorium period, once favorable clarity emerges on the potential impact on one’s finances.

Impact assessment for borrowers taking this moratorium over the medium term If you have a current outstanding of Rs 50 lakh, with 10 years remaining on a home loan with an interest rate of 8.75% and you defer the full 3 months of your EMI, the following is the higher payment you would make on the full tenure of the loan based on when you pay back the deferred EMIs to the lending institution:

In summary:

• 1. There would be additional interest on interest (since the amount of interest would be effectively added to your principal outstanding on the date of deferment). If you don’t make any prepayment during the tenure of the loan, the impact is significant.
  2. This would, therefore, mean that you should NOT utilize the total EMI holiday unless your cash flow position during the 3 months is stopped or disrupted.
  3. Do try and repay these installments at the earliest possible date to reduce the interest burden on your loan.
  4. Avoid deferring the payment of your credit card outstanding as the interest rates are high.