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Loan Moratorium: Opt-In or Opt-Out

April 03, 2020 / By fundsPI

‘Opt-in’ or ‘Opt-out’ is the new buzz word amongst the borrowers of banks, NBFCs & other financial institutions. Covid-19 pandemic is making a huge impact on domestic economy and measures taken to contain its spread is severely affecting every individual earning capacity – so be it salaried employee, self-employed person or small business owner, everyone’s income is getting affected. Government is taking many policy level initiatives to reduce the economic impact & as a step in that direction, RBI announced Loan Moratorium program to reduce the direct impact of loan EMIs on individuals and businesses income. RBI has allowed banks, NBFCs & other financial institutions to defer their borrowers EMI by 3 months till May’20 without impacting borrowers credit report.

Almost all the borrowers welcomed this move and planned to defer the EMIs to take benefit of Loan Moratorium program. But on going through the details of the policy & working on the interest, principal & tenor calculations, majority of the borrowers got confused on whether to delay EMIs or pay it as per normal course. The most important point in Loan Moratorium policy that created confusion in the mind of borrower is the ‘Deferment of loan EMIs along with interest accruals’ & not ‘Waiver of loan EMIs’.

EMI deferment with interest accruals not only extends the tenure by deferred EMIs, but also add extra EMIs in the longer run. So, if you miss say 3 EMIs on your loan and you have 60 EMIs left, at the end of 3rd month, your pending EMIs will not be 63 EMIs (60EMIs + 3 deferred EMIs) but it will 65 EMIs. This is mainly on account of principal – principal is still outstanding and interest will be charged on pending principal over the balance tenure of the loan. Below table gives an example of deferring your EMI by 3 months and its impact on increase in EMIs;

From the above table one could easily make out that there is a cost attached to the loan moratorium and the cost is quite higher for longer duration loan.

So, should one ‘Opt-in’ or ‘Opt-out’ of the loan moratorium? Looking at the present situation and still unknown ongoing impact of Covid-19 pandemic, it is definitely a sensible thing to preserve cash. For all those whose income levels are going get impacted severely, mainly those operating in aviation, tourism, hospitality, tours & travels and other directly impacted industries, it will be prudent to ‘Opt-out’ to take the benefit loan moratorium. And for those who are not sure about the level of impact on their incomes, they can consider option of ‘Opt-out’ for a month before deciding on future course after looking at the extent of pandemics impact. As availing the loan moratorium has a cost attached to it, if you are comfortable on cash flow or don’t see much impact on your incomes, you should ‘Opt-in’ & continue paying your EMIs.

Categories: Mutual Fund, Investment

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