RBI’s Secret behind EMI Holidays: Know the Pros and Cons

RBI’s Secret behind EMI Holidays – The Reserve Bank of India (RBI) has been rescuing the corporate borrowers bearing the problems coming due to the lockdown along with the individuals facing income disruptions due to the nationwide shutdown after the spread of novel coronavirus, which has swept the entire world. A few measures from the reduction in the repo rate and cash reserve ratio to a three-month moratorium on the term and credit card loans are expected to provide immediate relief to the borrowers.

“RBI’s policy announcements are not only bold but also decisive, compelling and with a humane touch in attenuating to the needs of the economy to fight through the pandemic. The large rate cut along with the adjustment in the capital conservation buffer also the moratorium on repayments and the bazooka of conventional CRR cut and unconventional liquidity measure of incentivizing banks to support CP market all will help financial markets stabilize, lead to immediate rate transmission and address the credit needs of the real economy,” as said by the SBI Chairman Rajnish Kumar.

It will give a big relief to the employees who get salaries and work in struggling companies, fearing a delay in the salary, pay cuts, and even job loss but also self-employed individuals facing the income loss. 

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Thomas John, the Chairman and managing director of the Muthoot Pappachan Group says that the move will provide some relief to individuals, especially self-employed ones, who are facing income loss due to the ongoing lockdown. Several measures have been taken to nudge banks to lend and to inject liquidity into the system will help in passing the benefit to the potential borrowers who are the people with small businesses, self-employed and so on – in a dire situation right now, with everything shut-down. 

Following are the impacts which have been done by the RBI:

Relief on loan repayments

The moratorium is applicable on all term loans and credit card loans outstanding as declared on March 1, 2020, for the next three months, that is from March 1 and May 31. 

But, the point should be noted that the interest charging meter of lenders will not stop and this interest will keep adding to your loan outstanding. “Like most other things, this moratorium doesn’t come free for consumers. They would need to pay the accrued interest along with their resumed payments from June onwards. However, that’s a small price to pay for getting this immediate relief,” said Kunal Varma, CBO, and Co-Founder, MoneyTap. 

There is no clarity that the moratorium period is optional or mandatory. But, the State Bank of India has already made it mandatory for all borrowers. So, SBI borrowers will not have the option to pay their EMIs during the moratorium. Other banks are yet to clarify the same.

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“If you can afford to repay your loan EMIs, you should try to set aside that amount even if you’re not required to pay them during the moratorium unless doing so will adversely impact other pressing financial requirements. This would ensure speedy lowering of loan burden once the moratorium ends. Most importantly, get complete clarity with your lender how it will impact your loan before reaching a conclusion and don’t assume anything based on hearsay,” says Bankbazaar.com CEO Adhil Shetty.

Even though, if your bank makes it optional,  the customers can use this window to shore up your contingency fund if you are facing cash crunch or fearing a job loss or income disruption. “The three-month EMI moratorium is a welcome move for those customers whose short term cash flows are adversely affected by the coronavirus pandemic. It is not a waiver, but only a shift in payment schedules,” explains Varma of MoneyTap.

If you are a  government employee or working with a blue-chip company with a strong balance sheet and no immediate fear of job loss or income disruption, you can avoid bearing extra interest costs during the moratorium period and pay your EMIs without disruption if your bank allows.

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Repo rate cut to ease home, car loan repayment burden

The advantage to the borrowers from the RBIs move is that they can see a significant reduction in the EMI. the reduction of repo rate by RBI has reduced 75 basis points to 4.4 percent, your repo rate-linked home, car, education, and other term loans will get cheaper. For example, if you have taken a loan of Rs 1 crore for 20 years at 8.25 percent, your EMI will decrease by Rs 4,648 at the new interest rate of Rs 7.50 percent.

“Loans, on the whole, will be cheaper and consumers can save money owing to the measures. This will put more money in the hands of people and create a higher demand in the overall economy as consumption would go up,” says Surendra Hiranandani, Chairman, and Managing Director, House of Hiranandani.

SBI has already passed the entire 0.75 percent interest fall to the borrowers both for external benchmark rate-linked and repo rate-linked loans.

What does it mean for new borrowers?

The cut in the repo rate will promote banks to reduce the lending rates for new borrowers, which is the key to boost the economic activity in the country. Manish Khera, the founder, and CEO, of HAPPY a fintech lender, says that with the RBI intervention, the probability of a V-shaped recovery has been increased, that is the annual growth rates might be able to fully absorb the shock in the long-term. However, the cut in reverse repo rate will make it unattractive for banks to passively deposit funds with the RBI and instead lend it to the productive sectors like industry and agriculture. “The cut in cash reserve ratio together with other measures will inject greater liquidity into the market and there won’t be a shortage of cash flow in the economy. However, the quick transmission will be key to the huge liquidity infused by RBI,” says Hiranandani.

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No impact on your credit score

Be assured that the three-month moratorium on loans will not give any impact on your credit score as the RBI has clearly specified that CICs shall ensure that the actions taken by lending institutions do not adversely impact the credit history of the beneficiaries. “Non-payment of loan EMIs during the moratorium will not impact your credit score, as mentioned by the RBI Governor. As such, you should stay on top of it by checking your credit score regularly during the moratorium period,” says Shetty of Bankbazaar.

Sathya Kalyanasundaram, Country Head and Managing Director of credit bureau Experian India assures by saying “RBI’s decision to allow a moratorium period of three months for all outstanding loans provides relief to borrowers and their credit scores and is reassuring to all those who have been impacted financially due to the fallout of this pandemic”

What it means for depositors

Depositors will feel disappointed as deposit rates will also go down. Further, the RBI Governor Shaktikanta Das has assured the depositors that the banking system is safe and they should not resort to panic withdrawals as happened in the recent past amid COVID-19 related volatility in the stock market. 

“Despite the lowering deposit rates along with a tax on returns, FDs and RDs should continue to be the favored investment instrument of risk-averse investors. Depositors should not worry about the safety of their deposits, as assured by the RBI Governor, and prefer digital transactions,” Shetty says.