Are you running a Home Loan or a Loan Against Property , car loan or an Unsecured Business Loan and are wondering what does the announcements by RBI on 27th March 2020 (Covid Package) mean for me?
Based on the common questions received by us from a vast number of clients, we have tried to compile a FAQ for your reference.
1. Does the announcement by RBI mean, that you will save on your Interest cost??
NO. This announcement by the Reserve Bank of India DOES NOT mean that you save on your Interest costs. This is not an EMI Holiday.
RBI has announced an "EMI Moratorium". This means that you may not pay your EMIs during the Moratorium period. However, the interest cost will still be incurred. The RBI circular in this regard clearly mentions "The Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period".
To illustrate, lets us assume that the Principal Outstanding on your home loan is INR 1,00,00,000 (One Crore) as on date and your loan carries an interest rate of 9%. This would mean that your interest cost is INR 75,000 per month. If you are granted a 3-month Moratorium, at the end of 3 months, the principal outstanding of your loan would become INR 1,02,25,000 and your EMI repayments will start accordingly.
(We have ignored the potential impact of compounding during the moratorium period in the above illustration)
2. Should I opt for the EMI Moratorium? Does it help me?
As illustrated above, EMI moratorium is not a savings in your interest costs. It is infact, like availing a top-up loan (of equal to 3 EMIs) on your current loan. You will be paying interest on this top-loan as well.
Therefore, it is just a liquidity management tool. You must avail of the EMI moratorium only if you have current or potential cash flows issues and the moratorium will help you tide-over these cash flow issues.
Continuing the above illustration, assuming that your balance tenure was 20 years and your EMI was INR 89,973. If you have opted for the 3-month EMI moratorium, you will save a cash flow of INR 269,919. Effectively, this savings in cash flow over is just like taking a loan today from the bank for INR 269,919. If a fresh loan of INR 269,919 is offered by your bank today, and you think you will take it because that will help you in your business or personal expenses, you should opt for the Moratorium.
If you will not accept the bank’s offer for this loan, you should not opt for the EMI moratorium.
3. Can you illustrate, what happens to my interest cost if I opt for Moratorium?
As you can see from the below illustration, if you opt for Moratorium, your interest cost goes up by INR 2.6 lakhs to INR 12.14 lakhs depending on the option you chose.
Scenario 1: At the end of the moratorium period of 3 months, your EMI increases, and your tenure remains at 240 months (the current balance tenure).
Scenario 2: At the end of the moratorium period of 3 months, your EMI remains unchanged and your balance tenure increases.
|If you don't opt for Moratorium||If you opt for Moratorium - Scenario 1||If you opt for moratorium - Scenario 2|
|Balance Tenure||240 months (20 years)||240 months (20 years)||256 months|
|Your Loan EMI||89,973||91,997||89,973|
|EMI Start Date||Apr-20||Jul-20||Jul-20|
|Loan End Date||Mar-40||Jun-40||Nov-41|
|Total Repayment (Principal + Int)||2,15,93,423||2,20,79,275||2,30,33,090|
|Interest Paid during Loan Tenure||1,15,93,423||1,18,54,275||1,28,08,090|
(We have ignored the potential impact of compounding during the moratorium period in the above illustration. We have also ignored the impact of potential Reduction in EMIs as a result of rate reduction measures announced by RBI because these would be available, whether or not you opt for moratorium)
4. Will my EMI increase if I opt for the EMI Moratorium?
Yes. The RBI circular mentions that "the repayment schedule for such loans as also the residual tenor, will be shifted across the board by 3 months after the moratorium period". This clearly implies that banks have to limit the increase in tenor to 3 months. Mathematically, that cannot happen unless the EMI increases because the interest during moratorium period will get added to the principal outstanding. So, in the illustration mentioned above in Point 3, Scenario 1 (where EMI increases to INR 91,997 from INR 89,973) will become an automatic choice.
(We have ignored the impact of potential Reduction in EMIs as a result of rate reduction measures announced by RBI because these would be available, whether or not you opt for moratorium.)
5. Is it compulsory for the banks to grant the EMI Moratorium?
No. RBI has simply permitted the banks/ financial institutions to grant a 3-month moratorium. It is the discretion of individual banks to allow or not allow such a moratorium.
6. Has any bank announced EMI moratorium yet?
Media reports suggest, that SBI chairman has announced that they will provide moratorium to their borrowers. However, the exact specifics on the implementation of the same will be worked out in due course.
7. How do I avail the EMI Moratorium? What is the process?
Most banks other than SBI are yet to announce their stand on the EMI moratorium. It has Under the current situation, if you want to avail of EMI moratorium, it is advisable to write to your bank and document your request along with your situation (Closure of business activity/ job loss/ pay cut etc resulting from the Corona Virus disruption). This would help the bank to consider your request once they have finalised the mechanics around it.
8. If I opt for moratorium, do I have to pay 4 EMIs at the end of 3 months?
No. You will not be required to pay 4 EMIs at the end of 3 months. Your EMIs will re-start after 3 months and the tenure of your loan will shift by 3 months. For instance, if your home loan was originally supposed to end in March 2040, it will not get over in June 2040.
9. My EMI is due on 1st April 2020. Will the EMI be deducted from my account?
Even if your bank agrees to provide EMI Moratorium to you, the process of implementing it may take a while. This means that if your next EMI date is in the 1st week of April, the EMI may be debited to your account.
10. Can my bank offer EMI moratorium to me?
All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) are permitted to grant the EMI Moratorium.
Link to RBI Circular: https://m.rbi.org.in/scripts/BS_Circular IndexDisplay.aspx?Id=11835
[This version is dated 28th March 2020. We shall continue to update and modify this further based on developments and announcements from various banks.]
Related Blog = EMI Moratorium: Is it really 3 Months??