Read about impact of emi moratorium period on your future debt raising capacity

Impact of Home, Personal, Auto Loan EMI Moratorium: Following RBI’s decision, all banks such as SBI, HDFC Bank, Axis Bank, ICICI Bank etc. are offering EMI moratorium. Initially, the EMI moratorium was allowed for March to May. It has been now extended for another three months till July. While EMI moratorium has come as a relief for those whose financial situation has worsened due to Coronavirus pandemic, the facility comes at a cost. As EMI moratorium doesn’t absolve borrowers’ liability to pay interest on the loan for the period for which the facility is availed. Borrowers will have to pay the interest, for which banks will increase the total EMI number. FE Online talked to Prithvi Chandrasekhar, Chief Risk Officer, InCred, to get an insight into the impact of loan EMI moratorium facility on borrowers. Take a look:

Learnings from Moratorium 1.0

About 30-40 per cent of retail borrowers have availed Moratorium 1.0 and have chosen to keep cash-in-hand rather than pay their EMIs or minimum payments. As a result, they are choosing to increase the tenure of their debts, and will also incur higher interest costs.

Some of these borrowers have genuine issues because of the COVID-19 lockdown. Owners of small businesses in impacted industries or people who have lost their jobs might be in this category. The moratorium is providing genuine relief to this segment. It is reducing their immediate cash outflows while also protecting their reputation on the credit bureau.

Impact of moratorium on one’s individual capability to raise debt in future

Individuals who take the moratorium will see their ability to raise debt being adversely impacted, despite credit bureau score protections. They will be more indebted for a longer time than if they had repaid. Taking the moratorium also signals financial stress. Most lenders take indebtedness and financial stress into account while making lending decisions.

At InCred, our customer-facing teams take great pains to explain to borrowers that the moratorium is NOT a loan waiver. All the EMIs due and the associated interest ultimately need to be repaid. Once borrowers clearly understand this fact, they are more likely to take the pragmatic path and stay up to date with repayments.

Kind of loans most impacted on the account of the moratorium

The moratorium impacts all kinds of loans. It covers both secured loans like home loans, loans against property or auto loans, and unsecured loans like credit cards, personal loans or business instalment loans.

If an individual has opted for loan moratorium 1.0, should he go for moratorium 2.0?

There are a large group of borrowers who are in the salaried segment, who are still employed, who are taking out their cash and keeping it at home because of the uncertainty. While this “cash-hoarding” mindset may be understandable, it is irrational and not in the borrowers’ interest. Most such borrowers would be better off continuing to repay their loans and controlling their interest costs.

If the individual can afford to make repayments, it is clearly in the individual’s interest to make these repayments.

Repayment reduces the cost of borrowing. Repayments also help keep open more options to raise debt in the future.

Can a borrower cancel EMI moratorium?

An individual who has already taken the moratorium 1.0 can cancel and start repayments at any time. All lenders will permit this. There is no obligation to extend moratorium 1.0 to 2.0.

The moratorium is appropriate only for those who are in a severe short-term financial crunch because of COVID-19.