Banks, credit card companies and non-banking finance companies (NBFCs) - all have started warning customers of the perils of availing the extended loan moratorium offer for EMIs falling between June and August. The Reserve Bank of India (RBI) had recently extended the moratorium for another three months in view of the COVID-19 situation.
Unlike last time, banks are giving a clear picture to the customer about the pitfalls of the moratorium offer. The caution statement is this--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 instalments (EMIs) and more number of EMIs for the borrower later. Hence, if you have sufficient cash to continue paying EMIs, you should pay your instalments. Don’t add to your debt burden.
What are the scenarios here when a borrower approaches the loan moratorium extension? Obviously, when you are one of those who lost the job during COVID-19 or if your business is bleeding, there is no other option but to avail the moratorium. This will help you not to become a defaulter on the books of banks. Except in this scenario, should you stay away from the scheme completely? Not in all cases. Bankers cite a few scenarios where customers are seen opting for the loan moratorium other than for the obvious reason.
For instance, if you want to build an emergency corpus, this is a good way to save some money. In other words, if you are an individual unsure about the future of the current job, you might want to build an emergency fund corpus to save for expenses in the rainy days. The EMI amount saved over six months could help you generate some liquidity.
“After all, such EMI deferral offers don’t come always. It is also an opportunity for some. If you are at the risk of losing your job and have no other way to save money, using the moratorium offer wouldn’t be a bad idea,” said a banker with a private bank on condition of anonymity.
To prepay a costlier loan: Bankers say if the idea is to save some money so that you can prepay a costlier loan, then too availing moratorium on a low-interest loan makes sense. “No harm in saving a few EMIs and prepay the money later for a costlier loan where the interest rate is far higher. This makes sense for unpaid credit card dues, etc,” said another banker.
For the above two categories, future interest burden is not a big concern as much as near term liquidity worries.
For companies running out of funds. A number of companies — big and small — had applied for loan moratorium in the first round. Rating agency ICRA estimates at least 328 companies had applied in the first round with their lenders. In the second round too, initial indications are that a lot of firms have begun approaching their lenders. The loan moratorium will help these companies preserve some capital during the tough phase. This money can be used to pay salaries or electricity bills. This facility makes sense for especially smaller companies that do not have access to funds.
But moratorium is bad news for some too. For instance, microfinance companies who operate among low-income customers do not think that three months' extension of moratorium to their borrowers is a good idea. “My experience tells me that once this category of customers go off the track on regular payments, it is difficult to bring them back,” said a microfinance industry official. He too declined to be named.
What should you do?
You are the best judge to decide whether this offer makes sense for you or not. If you are someone with enough cash flows and don’t really require to avail this offer, it is better to continue with regular payments. If you are looking to generate some liquidity for near term use (emergency fund or prepayment of a costlier loan) loan moratorium makes sense for you. It’s a call you need to take.