Coronavirus Scare: RBI Provides EMI Deferral and Cuts Repo Rates

While all of us are staying at home amidst Covid 19 scare, all the expenses including the loan EMIs must still be paid. The salaried employees shouldn’t have much to worry, at least in the very short term since they will continue to get their salaries. However, a certain segment of self-employed, professionals, shopkeepers and traders who require in-person meetings to transact and grow their business can face cashflows issues. And the issue is not just limited to individuals. Many businesses will face serious challenges too due to this lockdown and may struggle to meet their loan commitments.

To provide relief to borrowers during these difficult times, the Reserve Bank of India has allowed banks and NBFCs to provide 3-month moratorium on term loan payment. The moratorium shall be on both interest and principal payments. Moreover, to reduce EMI burden and boost the economy, it has cut the Repo Rate by 75 bps. The Reserve Bank has taken additional steps to additional steps such as CRR cut and increase in Marginal Standing Facility to inject liquidity into the system.

In this post, we discuss the announcements that provide immediate relief to the retail borrowers i.e. loan moratorium and the Repo Rate cut.

I copy an excerpt from RBI Press Release.

All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.

RBI Covid-19 Regulatory package provides further clarity in this matter. I reproduce the relevant clauses.

In respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) (“lending institutions”) are permitted to grant a moratorium of three months on payment of all instalments1 falling due between March 1, 2020 and May 31, 2020. The repayment schedule for such loans as also the residual tenor, will be shifted across the board by three months after the moratorium period. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period.

The RBI Covid-19 regulatory package further defines what instalment means.

Instalments will include the following payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly instalments; (iv) credit card dues.

It Is Your Bank’s Choice

The banks have an option to allow moratorium. It is not your discretion. Therefore, if your bank does not allow, you can’t do much about it. If your bank permits, you wouldn’t have to pay EMIs falling between March 1, 2020 and May 31, 2020 on your home loans, education loan, auto loans, personal loans and or any other retail loans. The banks must take approval from their board about this moratorium and inform the borrowers about such the decision.

Will My Next EMI Be Deducted?

As mentioned earlier, if bank has permitted EMI deferral, the EMI may not be deducted. However, do not assume anything. Reach out to your bank for better clarity. Each bank may have a different policy. It is possible the banks offer this relief to only certain category of loans. OR that the banks offer this relief to only select customers. The banks may also give a choice to the customers whether they want to opt for EMI deferral or not.

This Is Not an EMI Waiver but a Deferment of EMIs

Your EMIs for the next three months are not being waived. If your bank permits, you won’t be required to pay EMIs for the next 3 months. RBI statement mentions that the repayment schedule and all subsequent due dates along with the loan tenure, shall be shifted by 3 months. Therefore, if your loan tenure was ending in June 2028, it will now be extended to September 2028. The interest for the period of deferral (non-payment) shall be added to the principal at the end of 3 months (up to May 31, 2020) and EMIs adjusted accordingly.

Will My Credit History Be Affected If I Do Not Pay the EMI?

If your bank suspends or permits non-payment of EMIs for 3 months, then your credit history will not be affected due to non-payment of dues. However, if your bank does not suspend your loan repayment and you still skip the EMIs (or the auto-debit request is declined), it will be reported to credit bureaus and your credit history will be affected. Do note, even if you bank suspends the EMIs and you don’t pay for 3 months, it will still be a good idea to check your credit score after a few months. These situations are ripe for mistakes in reporting to credit bureaus. You don’t want to mess up your credit score due to inaccurate reporting.

Does This Relief Also Apply to Credit Card Payments?

Even though there is some confusion about this, in my opinion, the answer is Yes. As per RBI Press Release, the relief is only for term loans. A term loan has a fixed tenure. Credit cards are revolving loans. Hence, you should not get any relief. However, RBI Regulatory package includes credit card dues in the definition of Installment. Hence, I think you will get relief on credit card payments too (if your bank chooses to provide). Do note the interest on credit card dues is quite high. Therefore, you must make the payment in full (even if the bank gives you the leeway).

What Is in This for the Banks?

From the bank’s perspective, these loans do not become non-performing assets if you do not pay your EMIs for the next 3 months. This relief helps them avoid increase in NPAs. Do note this relief can be given to all term loans i.e. this can be extended to even corporate loans too.

Repo-Rate Cut by 75 Basis Points

There is a sharp reduction in repo rates. RBI has cut the Repo rate from 5.15% to 4.4% p.a. So, if your loan rate is benchmarked against RBI Repo rate, this is a very good news for you. Just to give a sense of the impact, if you have a home loan of Rs 50 lacs for 20 years at 8.5% p.a. (and external benchmark is RBI Repo), your home loan EMI will go down from Rs 43,391 to Rs 41,047. Massive, isn’t it?

For investors who are on MCLR or base rate, they must explore switching to Repo Rate linked product offering from their bank, once the lockdown is withdrawn. Note that Repo Rate is an external benchmark and changes as soon as the Repo rate changes (of course the loan reset period is there). MCLR and base rate are internal benchmarks may take time to reflect lower costs.

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