Is the EMI moratorium not benefitting the borrowers?


RBI has come up with several relief measures to reduce the impact of the COVID-19 pandemic in congruence with several central banks across the world. On 27 March, after the proclamation of the first phase of lockdown by the government of India, RBI reduced the repo rate by 75 basis points and announced a three-month moratorium facility for all term loan and credit card installments which was further extended by another three months till August.

For the initial moratorium announced in March, roughly one out of the three borrowers had opted for relief, even though not everybody needed immediate relief. This is because of the uncertainty around salary cuts and job losses due to the pandemic which forced people to conserve cash.

Now with the advancement in cash flow as a result of the unlock process, a number of borrowers who had exercised the moratorium option are requesting the bank to opt-out of this.

According to Punjab National Bank, Managing Director, S S Mallikarjuna Rao, only 30% of borrowers utilized moratorium facility while 70% continued to service their loans.

R Baskar Babu, director, Suryoday Small Finance Bank points out that 80 percent of home loan customers aren’t exercising moratorium. Also, 54% of the borrowers who have availed the moratorium facility are expected to minimize.

Why is this happening?

RBI has mentioned in its notification that during the period of moratorium, interest will continue to be levied on the outstanding portion of the term loan.

For example, SBI has said for a credit 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 go for the moratorium.

The Borrowers who avail the choice are more likely to induce two options i.e. to pay the identical EMI with a rise in tenure or pay an increased EMI over the same tenure. That means at the close of the moratorium period, the interest accrued during the period will get added to the principal outstanding and this can ultimately increase the interest payable on the loan. The additional interest will be payable through the tenure of the loan.

The moratorium would be beneficial as long as there’s any disruption in your cash flows or there’s any loss of income. Though the interest on credit isn’t mandatorily payable immediately and gets postponed by three months, it continues to accrue on your account and ultimately ends up in higher costs.


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