When the Reserve Bank of India announced on March 27, permitting banks to extend a moratorium on term loans, this move was lauded considering the relief it can provide to many borrowers facing the financial stress during the nationwide lockdown. However, when the official notification was released by RBI post the announcement it gave us a different picture.
The first being “Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period” which means that, as on March 1, 2020, interest will be charged on the outstanding portion of the principal amount during the moratorium period.
Plus, “the accumulated accrued interest shall be recovered immediately after the completion of this period in respect of working capital facility”, that means, post-May 31, 2020, your instalment of the subsequent month will include the interest of the moratorium period along with that month’s corresponding interest amount.
So, after a detailed understanding of this notification and discussion with bank managers, it can be concluded that this scheme will be beneficial for people who are facing cash flow problems amid this lockdown.
Should salaried individuals avail this relief?
If you are a salaried person and are assured the receipt your salaries on time by your employer, then you won’t have any problems in repaying your loan. Also, considering the fact that you will be saving money on travel and fuel expenses as you are at home, this will leave you with having enough money to pay your EMI’s. In short, this moratorium relief is not of much relevance to you.
However, if you are salaried and unsure whether your employer will give you a full salary or maybe will be paid with just a part of your salary, then you should consider exercising this relief. Furthermore, if your company retrenches you, then you should consider using this option.
Should self-employed individuals avail this relief?
Most self-employed individuals take personal or business loan bearing interest at rates ranging between 16-24 per cent as it is not backed by any collateral. Availing this relief won’t be beneficial if you have excess money to repay the loan in full or in parts.
Given the situation of a slowdown in business and the moratorium taking effect for 3 months, it won’t be advisable to repay in full. However, prepaying the loan in parts and saving something to run your business once the lockdown period is over would be beneficial.
The part prepayment will reduce the outstanding loan and the resulting EMI’s. Additionally, there won’t be any expenditure on your dining, travel fuel and electricity during the current lockdown, and this will also result in savings.
Two Important Points to keep in mind before taking a decision:
Remember it’s not an EMI Waiver. The current 3 months EMI which has been deferred could increase the tenure of the loan, or if you don’t want to increase the tenure, then you would have to pay all the 4 EMI’s in the month following the moratorium period.
Better to clear your high-cost personal loan sooner than later. As personal loans bear an average interest rate ranging between 16-24 per cent and the instalment in the subsequent month can be hard to pay as it will include the high-interest amount of three months as well.
Taking the above points into consideration, the benefits to be reaped out of the waivers granted by the RBI can signify subjective depending upon the nature of income of the borrower and the liquidity of funds available during the moratorium period.
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