The loan moratorium announced by the Reserve Bank of India (RBI) in March came to an end yesterday and the repayment schedule resumes from today. Last month, the RBI had allowed lenders to formulate a one-time loan restructuring plan for COVID-19-hit borrowers. While a committee has been constituted to come up with a restructuring scheme for corporate borrowers, the finer contours have been left to individual bank boards. The options could include rescheduling of EMI payments, conversion of interest accumulated into another credit facility, or an extension of the moratorium (by up to two years) after assessing borrowers’ income streams. Banks have to put in place their frameworks by December 31, 2020.
“It would have helped if the banking regulator had provided a broad framework for such loan recast schemes. For now, going by the RBI circular, it looks like each bank will have its own loan recast scheme.” said Harsh Roongta, who heads Fee Only Investment Advisors, to Moneycontrol in an earlier podcast.
Since the implementation process is not standard across banks, borrowers face uncertainty. Many are yet to receive any clear communication from their banks on whether a one-time relief to such distressed borrowers, particularly to those who had taken the moratorium, would be offered.
Wait for your bank’s communication
Your bank would send you some communication as to how you must restart paying your EMIs. Moneycontrol reviewed one such message sent to a borrower by PNB Housing Finance.
“Every bank has its own rules for operationalising the moratorium. This will be governed by the terms of the moratorium and the loan agreement. Borrowers must remain in touch with their lenders to know how they need to operate from September 1,” says Adhil Shetty, CEO, BankBazaar.
Loan consultancy firm Mortgageworld.in’s founder Vipul Patel, says, “Write to your bank to seek a restructuring plan. Enquire about a likely resolution plan, on the lines of options mentioned by the RBI.” If you can repay your EMIs, you must do so and avoid any restructuring plans.
Keep an eye on the Supreme Court hearing
Meanwhile, the Supreme Court will resume its hearing, seeking an interest waiver for six months moratorium period. The SC has frowned upon the ‘interest on interest’ that borrowers taking the moratorium will have to pay. The apex court had remarked that there was no merit in charging interest on interest.
As Moneycontrol has pointed out several times earlier, the moratorium is not an EMI holiday, but a mere deferment of it. Interest will accumulate during the period and add to your total repayment burden.
The RBI had earlier argued in the SC that the moratorium was meant to provide interim relief to borrowers and that waiving interest would affect the banking sector’s financial stability, thus affecting depositors’ interests.
On August 26, the Supreme Court had asked the central government to clarify its stance on waiving off this accrued interest. The government is expected to shed light on its position during the hearing on Tuesday. As far as your loan is concerned, for the time being, the moratorium as we know it has come to an end. And your repayment of loans would now start.
Prepare for resumption of loan repayment
Irrespective of the SC verdict, put your finances in order. “Don’t wait for Supreme Court verdict. Plan your finances and start paying your EMIs from September onwards. If the verdict is in borrowers’ favour, then it’s a bonus,” advises Aparna Ramachandra, Founder-Director, rectifycredit.com.
Any mis-step at your end could come to haunt you later. “From September, if you start defaulting on your EMIs, you will be reported to the credit bureau. It will impact your credit score. Your chances of getting a new loan will also be hampered,” she adds.
Likewise, even if you do receive a loan restructuring proposal from your lender, it is in your interest to resume EMI payments. “Loan restructuring is not a straightforward affair. The bank will scrutinise your credit history before offering it. It should be taken only if your monthly cash flow continues to be impacted,” explains Kalpesh Ashar, certified financial planner, Full Circle Financial Planners and Advisors.
In fact, look at making a lump-sum part-payment to reduce the interest burden wherever possible. “If you have gold to offer as collateral, then opt for a secured loan to pay off an unsecured liability such as personal loan or credit card dues on which loan moratorium was taken. The unsecured liability comes at a higher cost then the secured one,” says Raj Khosla, Managing Director and Founder, MyMoneyMantra.
You can also look at redeeming your mutual fund investments – it’s a good time to take some profits – liquidating stock holdings or surrendering life insurance policies to reduce the loan outstanding and interest burden, as some borrowers did.
Opt for loan restructuring only as the last resort.