The six-month loan moratorium announced by the Reserve Bank of India (RBI) to allow more breathing room for borrowers amid the COVID-induced cash crunch is likely to end on August 31. While an official announcement is still awaited, bankers and industry watchers believe that the central bank is unlikely to extend the moratorium period after the RBI allowed banks to restructure loans to companies as well as individuals which have been due for 30 days or less before March 1 due to the impact of the coronavirus pandemic.
With the deadline fast approaching and the K.V. Kamath committee yet to come out with the modalities of restructuring of loans for both corporates and individuals, a lot of questions seem to bother borrowers regarding the future of loan repayments.
What are the options before borrowers?
There are likely to be two options before borrowers—start paying loans from September 1 or opt for restructuring of their loans, after discussing with banks.
Borrowers who must have opted for the six-month moratorium, but have the ability to repay from September 1, can either repay it in one shot or ask lenders to add these to their existing EMIs. Now, borrowers also have the option of converting interest accrued during the moratorium period into a separate loan.
In additional, borrowers can keep their EMI unchanged, but the loan tenure can be extended as well. However, it is advised that borrowers should aim to pre-pay the EMIs within the next 12 months in order to get rid of the additional debt incurred. Pre-paying 120 per cent of the EMIs that borrowers had to defer is ideal, meaning if a person deferred five EMIs, they are advised to pre-pay six additional EMIs over the next 12 months as it will help them bounce back in repayment plan and get out of debt quicker.
Will the borrowers ultimately end up paying more?
As per the debt servicing relief announced by the RBI, interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period. Deferred instalments under the moratorium will include the following payments falling due from March 1, 2020 to August 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly Instalments; (iv) credit card dues.
"The deferment of loan repayments will neither incur penal charges nor impact their credit score. However, those availing the extended loan moratorium will continue to incur interest cost on their outstanding loan amount during the moratorium period. This will increase their overall interest cost," Naveen Kukreja, CEO and Co-Founder, Paisabazaar.com, told the Economic Times in an earlier report. Hence, it was advised early into the moratorium period that borrowers with sufficient liquidity to service their existing loans should continue to make repayments as per their original repayment schedule. "Remember that the accrued interest on availing the loan moratorium can be significantly higher in case of big ticket loans like home loans and loan against property with long residual tenure and sizeable outstanding loan amount," Kukreja had cautioned.
Banks are likely to give three options to a borrower who has availed moratorium and is not opting for restructuring:
1. Make one-time payment of the accrued interest payable at the end of moratorium period, ie, from September 1.
2. Add the accrued interest to the outstanding loan and pay the same by increasing the amount of EMIs to be paid for the rest of the loan tenure.
3. Add the accrued interest to the outstanding loan and pay the same amount of EMI for a longer tenure thereby paying back the full amount.
If the borrower opts for one-time repayment and continues with your loan as usual, then his EMI does not increase; it would be the same as accumulated at the end of the six-month period. This is the best and the least expensive option.
If he opts for the second method, then the new EMI will end up to be slightly higher. However, if the borrower goes for the third option and keeps the EMI payments constant, then the loan tenure will get extended by two months.
Restructuring
A loan restructuring scheme helps borrowers to the extent that they can delay repayment of interest and principal amount, or repay loans at easy terms and conditions. These measures help address their immediate revenue losses.
Bankers prefer restructuring to extension of moratorium because the former intends to provide flexibility to banks. It was needed as there is a risk of banks’ NPAs rising by alarming proportions by the end of the year.
According to the RBI’s Financial Stability Report, the banks’ NPAs, which, until now, were showing a declining trend, are estimated to rise to 12.5 per cent by March, 2021. If the economic environment worsens further, the NPAs are estimated to rise to 14.7 per cent.
Crisil estimates that the loans at risk of slipping into NPAs this fiscal unless restructured by banks is at Rs 3 lakh crore. A scheme that will allow banks to not classify the non-repayment of loans as NPAs under certain conditions would provide relief to them.
In all its likelihood, the Kamath committee will leave it to individual banks and borrowers on the modalities of the one-time restructuring of personal loans. Under the restructuring plan, banks can now choose to reschedule loan repayments, convert any interest accrued or to be accrued into another credit facility, extend the loan tenor, or even extend moratorium up to two years for the existing loans, depending on the current repayment ability of the eligible borrower.
Home loan restructuring
The options include allowing EMI deferment for a few months in cases where the borrower has suffered total loss of income or allowing step-up EMIs, with a lower payout for a couple of years to make up for a reduction in salary or loss of income due to the pandemic.
Anyone with a 15-year loan who has availed moratorium for six months will already see their overall loan tenure extend by 14 months. This means that, at most, banks can defer EMI by a few months.
The exact relaxation would depend on the interest rate that the borrower will be paying. While home loan rates have come down to below 7 per cent, banks say that it will be difficult to provide their best rates to restructured loans as lenders have to make an additional provision of 10 per cent on restructured loans because such a move will increase costs by up to 30 basis points.
How beneficial are these moves for public?
Since it is not a waiver and only a grace period, the benefit of a moratorium seems to be more for people with older loans taken 10-15 years ago. They will not feel the burden as much as someone with a new loan taken 2-3 years ago. This is because the interest accounts for a larger portion of the EMI in the early years and progressively comes down.
Ironically, people with older loans may not really need the moratorium as much as those with younger loans.
