Retail borrowers concerned about the impact of COVID-19 on their finances, and thus, their ability to repay their loans have got some breathing space, thanks to the Reserve Bank of India’s (RBI’s) mega relief package announced on Friday.
They stand to benefit from the policy rate cuts, and a moratorium on all term loans, including home, auto, education, personal and credit card dues. The measures will benefit especially those whose equated monthly instalments (EMI) are due between March 1, 2020 and May 31, 2020. Considering the state of paralysis the domestic and global economies are slipping into, the RBI has given borrowers a lifeline to tide over any temporary financial crunch.
Choose shorter tenure, not lower EMIs
The repo rate cut of 75 basis points – from 5.15 per cent to 4.4 per cent – will mean huge savings on interest outgo for retail borrowers, particularly the ones whose home loans are linked to repo rates.
The State Bank of India (SBI) late on Friday evening announced transmission of the 75 bps cut to its repo-linked home loan borrowers with effect from April 1, as also a 20-50 bps reduction across tenures in retail deposit rates from March 28. Its repo-linked lending rate (RLLR) now stands reduced to 6.65 per annum from 7.40 per cent earlier. The new effective home loan rates will start from 7.15 per cent, down from 7.9 per cent at present. “Consequently, EMIs on eligible home loan accounts (linked to an external benchmark rate/RLLR) get cheaper by around Rs 52 per 1 lakh on a 30-year loan,” the SBI said in a statement.
All retail floating rate loans sanctioned by banks after October 1, 2019 have to be linked to an external benchmark – it’s the repo rate for most banks. These borrowers will benefit from a 75-bps rate reduction, when their bank resets the rates, which is once a quarter. “Banks tend to extend the loan tenure where possible and reduce the EMI. However, if you can afford to, it’s best to keep the EMI intact, so your overall interest payable goes down and your loan can be paid off faster,” advises Vipul Patel, Co-founder, Mortgageworld.in, a loan consultancy firm.
Even if your loans are linked to banks’ marginal cost of funds-based lending rate (MCLR), you will see your interest rates soften, as banks pass on the benefit of lower cost of funds to you. SBI has indicated that it will take a call on MCLR on April 20. If your bank does not pass on the entire benefit of RBI policy action, look at switching to an external benchmark-linked home loan. Even if current MCLR and repo-linked interest rates are comparable, the greater transparency that the latter offers makes it a useful proposition for borrowers.
Apart from the repo rate cut, the central bank has also slashed the cash reserve ratio (CRR) by 100 basis points. “Overall, the ample liquidity in the system will lower the cost of funds, which in turn will be passed on to borrowers,” says Siddhartha Mohanty, Managing Director and CEO, LIC Housing Finance. While housing finance companies’ retail floating rate loans are not linked to external benchmarks, softening of interest rates in the system will be transmitted to borrowers. Again, you should adopt the same approach: partial transmission of rate cut should prompt you to first negotiate with your lender and then consider switching to another institution that offers better terms.
Moratorium, the last resort
The moratorium and its implementation have attracted more attention than the substantial repo rate cut itself. It will cover all term loans, including retail loans – home, auto, personal and education – and credit card dues.
However, banks and lending institutions are yet to formalise the operational nitty-gritties. “It will help borrowers affected by the cash crunch due to COVID-19 impact. Borrowers can contact us to avail of this deferment. We will soon have a board-approved policy in place to extend the moratorium to those who need the flexibility,” says Mohanty.
The lenders, however, are yet to decide whether the moratorium will be extended to all borrowers by default or they will be given the option to seek this flexibility. “Many borrowers have given us an electronic clearing scheme (ECS) mandate to deduct EMI payments. We will discuss and frame a strategy on how to implement this facility,” says Virendra Sethi, Head, Mortgages and Retail assets, Bank of Baroda.
Now, a moratorium leads to postponement of your EMI payments and is meant to be used only in exceptional circumstances. “If you can, you must keep meeting your EMI commitments. This, along with the drastic rate reduction can ensure that you prepay your loan ahead of schedule and save on substantial interest outgo in the process,” advises Patel. Loan consultancy firm Mortgageworld.in’s calculations show that if a home loan borrower with an outstanding home loan of Rs 45 lakh and balance repayment tenure of 300 months were to avail of the moratorium, she will net interest savings of close to Rs 11.59 lakh over the entire tenure in the current situation, provided she maintains the current EMI of Rs 34,731. However, if she does not opt for the moratorium, her savings would be higher, at close to Rs 15.39 lakh (see table). Therefore, use the facility only if you are in financial distress.
The central bank has made it clear that interest will continue to accrue during the period. “A moratorium is not an interest waiver. Affordability permitting, it is better to pay your EMIs instead of letting your funds idle away in a savings bank account that yields 3.25-4 per cent interest. Ultimately, you will have to pay your EMIs after the moratorium period ends,” says Gaurav Gupta, Founder and CEO, Myloancare, a loan aggregation portal.
Strive to pay off credit card duesThe RBI has clarified that credit card dues, too, are covered under the moratorium flexibility. However, credit card users should also remember that since moratorium merely defers the payment, your dues will continue to accumulate interest during the moratorium or until you clear the bills. While the burden could be manageable for home loan borrowers given the prevailing benign interest rate regime, this may not be the case with credit card users. Being unsecured loans, the interest charged is exorbitant, upwards of 40 per cent per annum. Interest accrued on your credit card bill could balloon to an unmanageable amount if you do not make attempts to clear the dues.