EMI moratorium bears cost

Kashmir Magazine

Sajad Bazaz
Extension in EMI (equated monthly installments) moratorium by another three months announced by the Reserve Bank of India (RBI) has evoked mixed reaction in the market. Pertinently, EMI moratorium is not a loan or interest waiver scheme, but only provides a temporary relief for those whose financial situation has deteriorated due to the ongoing coronavirus pandemic. The borrower has to pay these deferred loan installments in future along with interest.

Now the extension in the moratorium period for another three months (up to August) has triggered a debate as most of the borrowers have started realizing that the facility comes at a cost. Opting for moratorium means the borrowers have chosen to increase the tenure of their debts and also bear higher interest costs.

Basically, there are two categories of borrowers looking at the option of EMI moratorium. Small businesses impacted by the pandemic and the people who lost their jobs following the coronavirus induced shut down of services and industries sectors have genuine reason to avail the temporary relief. It is reducing their immediate cash outflows and also protecting their immediate socio-economic commitments.

In case of individuals, who avail moratorium despite being capable of repaying their debt, can be hit by financial stress in future. They can see their ability of raising future loans being hit despite the fact that the moratorium facility protects credit scores of the borrowers.

As expert opinions are making rounds through various media channels about the costs and the impact which this EMI moratorium facility bears in future, a good number of borrowers who have already availed the facility are now in dilemma. The RBI and the government introduced the facility as a package, which exactly it’s not.

The EMI moratorium is as good as a ventilator for borrowers as well as banks. For banks, most of the loan portfolio, especially in retail segment, is bound to deteriorate as most of the borrowers won’t be able to remain committed to their EMIs on time. The six-month moratorium will rescue banks from bad loan scenario for some time. In other words, it’s a ventilator for the banks to protect their asset classification and avoid possible surge in non-performing assets. For borrowers, deferment of EMIs will temporarily provide relief to them as they will have more cash in hand to fund other emergencies induced by COVID-19 outbreak. Once this ventilator is removed, the situation would be most challenging for borrowers and obviously for banks also. If current volatile situation on health front triggered by COVID -19 is taken into account, the next six months are going to witness mayhem as more and more people would be struggling to fight the virus. Amid this situation, the revival of economic activities to the level of pre-coronavirus pandemic seems a distant dream at the moment.

So in the given situation understanding and analyzing the extension in EMI moratorium facility is inevitable. Remarkably, just a few days back, the Supreme Court has told the Reserve Bank of India (RBI) that the economic aspect is not higher than health of the people. The RBI had in an affidavit said lenders will lose around Rs 2 lakh crore if interest is waived during the loan moratorium.

"RBI trying to sensationalize the issue by leaking to the media," the Supreme Court said, as quoted by CNBC-TV18.Permitting a moratorium, but offering no relief through interest, is more detrimental, the apex court told the banking regulator.

Can a borrower opt out of EMI moratorium facility availed in phase 1?

Yes. Any borrower who has availed the facility in phase 1 can approach his/her bank to cancel the moratorium period and start repayments at any time. There is no obligation to extend moratorium from three months to six months. It’s noteworthy that repayments will reduce the cost of borrowing and also help keep open more options to raise debt in the future without hassles.

Isn’t it the responsibility of banks to educate their customers about the dangers of EMI moratorium facility?

In the first spell of the facility, the banks didn’t seem bothered to inform their customers about the perils of availing the moratorium offer. Now, immediately after the extension in the offer, banks have started informing their borrowers about the pitfalls of the moratorium facility. The banks are making it clear that the additional interest burden that will fall later will be huge. This is because the interest amount continues to get accrued on the outstanding loan amount during the moratorium period. This could mean higher equated monthly installments (EMIs) and more number of EMIs for the borrower later. Hence, if you have sufficient cash to continue paying EMIs, you should pay your installments. Don’t add to your debt burden.

Does this moratorium offer any long term opportunity to the borrowers?

Coronavirus induced lockdown has put the engine of economic activities at rest. There have been huge job losses and a significant drop in the income levels of individuals as well as businesses. In such an economic mayhem, the moratorium offers an opportunity as such repayment holiday rarely comes. In case a borrower is at the risk of losing job and has no other way to save money, it wouldn’t be a bad idea to avail the moratorium offer. A borrower can use the money saved by opting for EMI holiday to repay high cost loans where the interest payout is higher. For example a borrower can repay credit card dues by deferring the EMI repayment of low cost loans. As already mentioned above, credit card is an expensive loan.

As far as businesses are concerned, the loan moratorium will help these businesses to preserve some capital and can use the money to fund salary and other expenses. Ideally, small businesses have an opportunity to remain afloat as funds would be available to them by deferring EMIs.