The ongoing corona virus pandemic has hit people’s finances like never before. Since its start more than a year ago, many people across the globe have lost jobs or have had significant loss of income. Due to this, it has become hard for them to service their existing liabilities such as loans. To help such borrowers repay their loan obligations, the Reserve Bank of India (RBI) announced a loan moratorium as a helping hand for financially hit borrowers.
In 2020, the RBI announced a loan moratorium program. Once again in May 2021, as the second wave of Covid-19 hit India, the central bank announced a second resolution framework for borrowers including individuals.
So, has this loan moratorium been helpful or has it proved costly? Let’s find out all about the associated costs and how you can reduce them.
Who is eligible for a second loan moratorium?
The second loan moratorium announced this year is mainly aimed at offering relief to borrowers who have not opted for any loan moratorium previously and have been regular with their repayments.
Borrowers who are currently facing financial difficulties due to the pandemic have the option to apply for a total moratorium or they can request for deferment of their dues. This applies to both interest and principal amounts for a maximum period of 24 months or two years.
Borrowers who opt for this may also choose to pay only the interest on the principal amount. It is important to note that neither the interest nor the principal amount is waived off during the moratorium or restructuring period. As soon as the repayment holiday ends, the borrower has to continue with the original repayment tenure with higher EMIs.
They can also opt for increased repayment tenure with original or lower EMIs.
What are your options under the moratorium?
Loan moratorium can be availed for payment of interest and/or principal with or without modification of the remaining loan tenure. This is subject to the maximum stipulated term in the scheme.
What this means is that a borrower can apply for a complete repayment holiday whether it is principal or interest. A maximum total moratorium period of two years can be availed. You can also opt to repay only the interest component during the moratorium period.
After the moratorium ends, you can get back to the original tenure of the loan and use an accelerated repayment schedule with higher EMIs. You can also apply for an extension of loan tenure so that the repayment is more affordable.
The mechanism allows borrowers to opt for a tenure extension without the moratorium. This is being preferred by many eligible borrowers.
The Increased Cost of Moratorium
Borrowers must note that opting for a loan moratorium can increase liability for them since the interest accrued during the moratorium period on principal must be paid back after the moratorium period ends.
The interest payment will also increase since the outstanding loan amount increases as there is no payment of dues during the moratorium period.
Borrowers who wish to reduce the cost of the loan moratorium must ensure to continue paying at least the interest component of the outstanding loan amount since that outstanding amount remains affected.
What should borrowers do to reduce the cost of loan moratorium?
Since there is an extra cost attached to the loan moratorium relief, borrowers should use this facility only if they are unable to arrange the required cash. Borrowers should explore their emergency funds, if any, to pay the EMIs. Using the moratorium facility depends entirely on an individual’s liquidity in terms of available cash on hand.
If one’s contingency fund is available for the next six months, it is best to avoid the moratorium and continue servicing the existing loan. If you are left with no option except availing of the moratorium, use the higher EMIs option. Also, try to prepay in case your liquidity condition improves in the interim as this can help to reduce the overall burden. For those who have excess cash, prepayment of a loan is better than investing the same elsewhere, especially when the interest rate is rising.
Most borrowers who opt for moratoriums end up being victims of an adverse economic situation that could be beyond their control since they do not analyse and plan loan moratoriums before applying for them. The moratorium comes with certain costs in terms of higher interest payment and possible impairment of credit history to a certain extent.
Therefore, you should decide on opting for restructuring after a thorough analysis. If you are confident about stability in your future income then you can stick to the revised repayment schedule. Remember, if you default on the loan, it can have serious implications in terms of additional cost and easy access to credit in the future.