The Reserve Bank of India (RBI) on Friday announced extension of the loan repayment moratorium to borrowers by another three months from May 31 to August 31, 2020. While the move gives relief to small businesses whose money is stuck due to the lockdown, experts claim that individuals should refrain from availing the moratorium as it will come with a huge interest baggage.

“The moratorium should be used only as the last resort and individuals must avoid opting for it if they can. The relief is only temporary as the number of EMIs will increase sharply,” said Prashant Dwivedi, an executive who works with the State Bank of India’s home loan department.  

Dwivedi explains this with an example. If a buyer has availed a home loan worth Rs 45 lakh ahead of the lockdown, and assuming that the loan is for 25 years with 8 per cent rate of interest, opting for the six-month moratorium would mean adding 24 extra EMIs to his loan account. This is due to the compounding effect of the accumulated interest, which will be Rs 6.30 lakh additional interest.

For those who avail the loan moratorium, the EMI payments will restart only once the moratorium time period expires on August 31.And bankers claim that this is the reason why only about 25 per cent of the borrowers have so far opted for the moratorium offered.Experts suggest that those who have already opted for the first three-month moratorium should start paying it.

The Reserve Bank of India has also now permitted the banks to convert accumulated interest into a funded term loan.“Individual banks have the right to take a decision on whether this will be allowed for all borrowers. It is only an enabling provision and not a mandate,” Shaktikant Das, the RBI governor, had said.The thus-converted term loan does not have to be repaid immediately after the moratorium ends, he clarified.This can be repaid up to March 2021. However, there is still no clarity over what will be the interest of that term loan, and who all can avail it.

Temporary relief, but prolonged EMI burden
“The moratorium should be used only as a last resort and individuals must avoid opting for it if they can. The relief is only temporary as the number of EMIs will increase sharply,” said Prashant Dwivedi, an executive who works with the SBI.