RBI clarifies on loan moratorium: Are credit card dues included, what happens after 3 months and other vital points you should know

The Reserve Bank of India (RBI) cut interest rates on March 27 in a raft of emergency measures to shield the economy from the spread of the coronavirus.

The RBI initially said all financial institutions can provide a three-month deferment on payments of instalments for all term loans that were outstanding as on March 1. These measures would provide a huge relief for individuals, especially middle-class loan borrowers.

Yet, the announcement triggered a burst of queries from individuals on the type of loans that would be covered in the moratorium. Would credit card dues be covered, many wondered. Others wanted to know whether the Equated Monthly Installment (EMI) payments have been waived off entirely for three months.

The storm of queries forced the RBI to issue a clarification. Below is a summary of what you should know.

What kind of lenders can issue the moratorium?

All lending institutions. This means if you have taken a term loan from any lending institution, be it a regional rural bank, small finance bank and local area bank, a co-operative bank, all-India financial institutions, and NBFC (including a housing finance companies like HDFC), you can defer EMI payments for three months.

Alright. Can you be more specific on the three months?

Sure. The moratorium will apply for loan installments falling between March 1, 2020, and May 31, 2020.

Nice. What about the type of loans?

The good news is that all types of term loan borrowers can avail of this facility. The terms loans include home loans, automobile loans, farm loans, retail loans, and crop loans.

And yes, RBI has clarified that the installments will include credit card dues too.

Besides EMIs and credit card dues, principal and/or interest components of a loan and bullet repayments (lump-sum payment made for the entirety of an outstanding loan amount, usually at maturity) will come under the three-month deferment window.

Hmm. Will this affect my credit history?

No. As you might know, any loan repayments that are due over 90 days are classified as a non-performing asset (NPA). Your credit score maintained by credit rating institutions will then get affected. Now, if you don’t pay your EMIs in these three months, banks won’t term your account an NPA.

This is too good to be true. So what is the catch?

Yes, there is a catch. Remember, this is only a temporary deferral and not a waiver of your loan installments. Nor is it a payment holiday.

This means that once the moratorium period ends, your loan tenure will get adjusted to your repayment, including the interest payment burden. In other words, the EMI burden only gets postponed for a while.

Look at what the RBI clarified: “The repayment schedule for such loans as also the residual tenor will be shifted across the board by three months after the moratorium period.”

Also, note that the interest amount shall continue to accrue on the outstanding portion of the term loans even during the moratorium period.

What this means is that there is no real waiver on loan repayments but only postponing the burden. Only that non-repayments in these three months will not amount to loan default. A borrower gets a breather for three months to arrange or accumulate money to pay banks once the relief period is over.

Also, although the RBI has permitted banks to offer moratorium to their borrowers, individual banks need to decide the modalities based on their rules. “Lending institutions shall frame board-approved polices for providing the abovementioned reliefs to all eligible borrowers,” the RBI said in the circular.

So what should you do?

If you have enough cash flows to continue loan repayments, it is better to do that. This is because ultimately, the loan repayment burden, including the accrued interest component, will fall on you. If you are facing cash flow issues due to the Covid-19 lock-down, you have three months of time to manage your payments without a lender breathing down your neck or your credit score getting affected.

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