The Reserve Bank of India (RBI) has extended the loan EMI moratorium for another three months till 31 August. Roughly one out of three borrowers had opted for the initial loan moratorium announced in March, though not everybody actually needed immediate relief. An online survey by ET Wealth shows that while 33% of the borrowers opted for the moratorium, almost one out of every three such individuals opted for relief only to conserve cash. The survey was conducted last week after the end of the first moratorium on 31 May and got responses from 938 borrowers from across the country.
Our survey also shows that the stress is only getting worse. Nearly 80% of the respondents who opted for initial relief will also avail the extended moratorium. Further, some of those who didn’t go for the initial moratorium may now seek relief. The number of borrowers availing the moratorium has gradually risen since March. The salaried class, which held back initially, may now opt for a moratorium following widespread pay cuts and job losses. Those in the worst affected sectors such as aviation, tourism, hospitality, transportation and media are particularly feeling the pinch.
Weighing the costs
The looming uncertainty is making individuals rush to the safe side. While 33% of moratorium seekers are not really facing financial difficulties or prospects of salary cuts, 23% fear they may lose their job or face a pay cut. They have opted for relief before such an eventuality actually happens. Suresh Sadagopan, Founder, Ladder 7 Financial Advisories, points out, “With extended lockdown in many areas, uncertainty around salary cuts and job losses has only increased. People are now choosing to conserve cash in this situation.”
Many borrowers not really facing crunch
Experts say don’t opt for relief unless facing stress.
Our survey shows that many borrowers have sought relief for more than one loan. Nearly one of every three moratorium seekers have done so for at least two loans. Experts say borrowers should not go for the relief if they are not facing financial stress. The moratorium is only a deferral for a few months, not a waiver. Banks will charge interest on the unpaid amount. Go for it only if you are unable to pay the EMI. “The moratorium is a relief only from the immediate cash flow perspective,” points out Rohit Shah, CEO, Getting You Rich.
While the deferral will provide some breathing space, the costs will add up in coming years. Borrowers should prioritise loans on the basis of the cost. They should try to continue servicing the high cost loans or those with longer repayment tenures and seek relief for low-cost ones. “Since different loans carry different interest rates and residual tenures, the postponement of EMIs must be done after careful deliberation,” says Prableen Bajpai, Founder, Managing Partner, FinFix Research & Analytics.
The impact of missing EMIs will vary for different borrowers. Loans which have a long tenure ahead will bear a higher cost. EMIs are structured in a way that the interest component forms a bigger portion of the repayment in the initial years. So, if you are missing EMIs early on in the loan schedule, a bigger amount of unpaid interest gets added to the loan. “Even a single missed payment early in the loan tenure compounds into a big liability with time,” remarks Adhil Shetty, CEO, BankBazaar.
One in three deferred loans is long term
Remaining tenure of largest loan under moratorium
If someone took a loan of Rs 50 lakh at 8.5% for 20 years in May 2019, and defers three EMIs, the unpaid interest will compound to add 11 more EMIs to the loan tenure. The total cost of missing three EMIs of Rs 43,391 each will jump to Rs 4.48 lakh. The impact will not be so stark for someone who has completed 10 years of the loan tenure. Those at the fag end of the tenure will feel a marginal impact.
Loans in early stages will get impacted more
If three EMIs are skipped:
More EMIs skipped mean bigger interest cost
It is no surprise that a large chunk of moratorium seekers are home loan customers with big-ticket EMIs. Nearly two-third of the survey respondents have availed moratorium for home loans and 58% of these have a residual tenure of more than 10 years. Loans with high interest rates will also add a hefty interest burden if 2-3 EMIs are skipped. Nearly 40% of the respondents have availed relief for personal loans which charge 18-24%.
Mostly home and personal loan customers seeking relief
Type of loans under moratorium
Many financial portals and banks have come out with online calculators to compute the interest cost of the moratorium. The bottomline is, don’t go for it unless you really face a cash crunch. Kalpesh Ashar, Founder, Full Circle Financial Planners and Advisors, suggests borrowers cut corners elsewhere before taking the moratorium path. “Rework your cash flows and divert unnecessary expenses towards paying EMIs,” he says. You can even stop SIPs to pay EMIs, but do not compromise on life and health insurance.
Another survey by IndiaLends shows that 72% of respondents plan to take a personal loan to tide over the liquidity squeeze. Taking a loan to pay off another is a surefire way into a debt trap. Make other arrangements to tide over the cash crunch. Consider liquidating surplus gold or any low-yield investments.
Forced to take moratorium
Most banks and NBFCs have left it to borrowers to ‘opt-in’ for the relief. Unless you actively seek the moratorium, your loans will carry on as before. But many banks have also adopted an ‘opt-out’ mechanism. All eligible borrowers are automatically given the moratorium unless someone specifically opts out of it. For borrowers of these banks, it is critical to proactively exercise the right choice, especially since the moratorium has now been extended by three months. For someone not facing any cash flow issues, moratorium is of no benefit. Rather it is an unwanted burden. Why shell out higher interest outgo later when you can service your obligations today?
Some borrowers not aware of implications
What borrowers think will be the impact of opting for moratorium.
Similarly, many banks will not automatically offer the extended moratorium. In most cases, borrowers will have to re-apply for extension. SBI customers will receive an SMS on their registered mobile number. If they reply ‘Yes’ within five days of receipt of the SMS, they will get relief for the next month. ICICI Bank customers can apply for the moratorium extension on its website only for June right now. If you want to extend it further you will have to reapply for July and August. HDFC Bank customers can reapply for the extension either one month at a time or for the next three months at one go.
After moratorium ends
Borrowers will be faced with three options at the end of the moratorium period. They can make a one-time payment of the interest that accrues during the moratorium period. Or the accrued interest can be added to the outstanding loan and EMI increased accordingly. The third option is to add the interest to the outstanding loan and increase the loan tenure.
Most banks are likely to makethe third option the default choice. This is also what 64% of respondents have opted for in our survey. Barely 20% of the borrowers want to make a one-time payment of the accrued interest once moratorium ends. Some lenders may provide borrowers the option to pay off the accumulated interest in one shot at the end of the moratorium. Planners say those who have the means should ideally use this option. “Your best option would be to pay the accrued interest at the end of the moratorium and continue with your loan as usual. This would be the least expensive option,” points out Shetty.
How will you pay the moratorium interest?
If circumstances prevent you from paying off the accumulated dues immediately, go for the second option of increasing the EMI. This is suitable for those with longer residual loan tenure—the EMI hike will be marginal and yet the projected interest outgo will be lesser than if you let bank extend loan tenure. “While choosing between increased tenure and higher EMI, one must do the math and understand the repercussions in terms of final interest outgo,” asserts Bajpai.
Hike EMI or loan tenure?
Increasing the loan tenure adds to interest burden. If possible, hike the EMI instead of increasing the tenure of the loan.
Financial planners often advise clients to prepay long-term loans. “When your personal circumstances improve or you get a deferred bonus or increment from your employer, consider pre-paying the loan partially,” suggests Sadagopan. Planners also suggest home loan borrowers renegotiate terms with their lender to take advantage of the reduced interest rates. The RBI has cut interest rates by 115 basis points since the pandemic took hold in March. “If you are not on a repo-linked loan, consider switching over immediately,” Shah asserts. “It will allow you to benefit from the lower interest rates and lighten your interest burden.” Ashar exhorts, “Make the effort to ask for lower interest rate. Your bank won’t hand it to you on a platter.”
Majority of borrowers want to prepay loans
Prepaying high-cost loans is a good idea.
Avoid credit card relief
Interestingly, only 10% of the respondents have opted for moratorium on credit card dues. Credit card users face a different set of options once moratorium ends. Unlike normal loans, card users cannot escape high interest charges simply by paying off the accrued interest. They have to repay the full outstanding balance to avoid high charges. One out of every five respondents is likely to do so, shows our survey.
Few takers for moratorium on credit card dues
Deferring credit card dues is a costly affair compared to skipping a home loan EMI. If you don’t have enough for the full repayment, you can pay the minimum due amount and roll over the balance to the next month until dues are repaid. More than 36% of the respondents will choose this path. This is a strict no. The outstanding balance as well as the additional purchases made on the card will be charged 3-4% monthly interest. Not just that, but you will be charged interest on the interest. If not paying for six months, you will fork out as much as 26.5% in interest (see graphic).
Don’t use moratorium for credit card bill
A credit card bill of Rs 50,000 can zoom 26.5% in 6 months.
“Avoid opting for moratorium on credit card dues,” insists Sadagopan. “Pay the entire outstanding amount at the end of the billing cycle and do not get in the habit of revolving the credit.”
How credit card dues will be paid after moratorium
There is another alternative for those strapped for cash—convert outstanding credit card dues to easy EMIs. Up to 47% of card users seeking relief will opt for this route. Most card companies are willing to let you convert outstanding amount into a loan at a charge of upto 18% per annum. This will still be lower than the 36-48% annualised interest rate charged by cards for rolling over the credit card balance.