Loan Moratorium Relief - Boon or Bane for Borrowers
The Reserve Bank of India (RBI) has extended the loan moratorium for another three months till 31 August 2020. With this the total moratorium increased to 6 months. Moratorium does not mean is a complete waiver of neither loan nor interest thereof. In other words, it is prolonging the period of liability. As a banking practice, when interest is not paid it shall be capitalized (means added to the balance loan amount) thereby the loan amount increases. Though opting for moratorium is not a wise call but many have opted it for different reasons. Some thought that it is a top-up loan, others opted to conserve cash for a temporary period. As per survey initially 33% of the borrowers opted for it but it has gradually risen due to prevailing uncertainty of COVID 19 pandemic. Following widespread pay cuts and job losses across many industries like aviation, travel, tourism, hospitality, construction etc which employ majority of workforce. While the deferring EMIs may give some instant relief but in a longer run it will add up to the total borrowing cost also increases total tenure of the loan. Let us assume if some took a home loan of Rs 50 lakhs at an interest rate of 8.50% per annum for 20 years in May 2019, and defers three EMIs, the unpaid interest will compound to add 11 more EMIs to the loan tenure. The total cost of deferring three EMIs of Rs 43,391 each will jump to Rs 4.77 lakh. Whereas one who avails deferral of six EMIs the total cost of deferring would jump by Rs.9.05 lakhs for the entire tenure. The impact will not be so severe for someone who has completed 10 or 15 years of the loan tenure. On the contrary, if a home loan borrower who repaid loan of 17 years with only 3 years remaining, the total cost jumps only by Rs.35,000. Hence, one has to evaluate the options carefully by considering the total loan period, remain period of loan, rate of interest, the purpose of such deferral and opportunity lost.