The moratorium on loans comes to an end. What should you do next?

The economic upheaval caused by the pandemic is evident. As the country went into lockdown in March, the Reserve Bank of India announced a moratorium of 3 months on all retail term loans to help individuals deal with the economic impact caused due to COVID 19. It was subsequently extended to another 3 months in May. 

The month of August marks the end of the moratorium period. Last week, the RBI ruled out further extension of the moratorium. 

What are the options available after the end of the moratorium?

Are you someone who has availed the moratorium on your loans? These 6 months might have provided you relief from payment of loan EMIs.

How do I proceed further? Do I have to repay the entire interest in one shot? Do I get further relaxation? There may be many such questions in your mind as the economic conditions still are not good yet. 

Through this post, we will bring out some of the options available to you after the end of the moratorium that you may choose to avail depending on your financial situation.

Repay your accumulated interest

While you got relief from EMI payments during the moratorium, the interest on your principal amount kept piling up. If your outstanding loan amount was big and you were in the initial days of your loan, the accumulated interest could be a big amount. 

If your financial situation has improved, you should try to pay off this accumulated interest and then continue with your regular EMI payments. Payment of even a portion of the accumulated interest may prove hugely beneficial in reducing the interest burden on your loan. 

Opt for extension of the loan tenure

If your financial situation hasn’t improved yet and repayment of the accumulated interest is not an option, then you could continue paying your scheduled EMIs but with an extension of the tenure of the loan. This is the option provided by most lenders. The accrued interest for the moratorium period is added to the principal and the tenure of the loan is extended for the number of months for which the moratorium was availed. 

Review your interest rate and refinance your loan

During the past few months, the RBI has reduced the Repo Rate (the rate against which banks borrow money from RBI) from 6% in Apr 2019 to 4% in May 2020. Floating rate loans like Home Loans are linked to the Repo Rate. So, the home loan interest rates have reduced to 7-8% range now. 

If you have a loan linked to earlier benchmarks like Marginal Cost Based Lending Rate or the Base Rate, you could approach your lender or even other lenders to make a switch to the lower interest rate. There will be a conversion fee payable on such a switch. But it might still be better off to do that. 

Experts say that even a 0.5% reduction in the interest rate could make a huge difference over the term of the loan. This strategy will pay off well if your loan is in the initial stages of repayment. You could either opt for a lesser EMI and continue with the existing tenure or opt for a shorter tenure and get benefitted from the lower interest burden.

But, banks may be hesitant to allow balance transfer for those who have availed a moratorium. You may have to prove that your financial position is sound and future EMIs will be paid on time.

Opt for Loan Restructuring

Considering that we are still not out of the pandemic and many people continue to have pay cuts or total loss of income, the RBI has allowed a one-time restructuring of retail personal loans and corporate loans. 

How is Restructuring of Loans different from Moratorium on Loans?

In moratorium on loans, you are exempted from payment of EMIs for the fixed time and the interest accrued gets added to the principal. But under a loan restructuring scheme, there are a variety of possible options which could be worked out with your lender if you are facing financial problems in making EMI payments even after 31 Aug 2020. 

Unlike a moratorium which was a blanket provision available to everyone, loan restructuring would be customized to meet the financial needs of the particular borrower. The restructuring would depend on the existing financial conditions of the borrower. The options that could be available to you under loan restructuring could be 

• Extension of tenure 
• Option to convert the accrued interest  during the  existing moratorium as a  separate term loan
• Reschedule loan repayments
• Reworking the interest rate
• An extended moratorium for up to 2 years

Also, the moratorium was allowed for everyone to apply, but restructuring requires you to meet certain conditions to qualify.

The single most important condition is that your loan should have been categorised as ‘Standard’ and should not be in default for more than 30 days as on 01 March 2020. This means that you should have paid all EMIs on your existing loans and shouldn’t have defaulted beyond 30 days. An additional inference here is that for loans borrowed after 01 Mar  2020 will not be allowed for restructuring.

Also, the provision of restructuring will depend on the income stream of the borrower. The individual who wants relief under the restructuring resolution plan will have to approach the lender who has all rights to allow restructuring and decide on the kind of restructuring that could be offered to the borrower after the verification. 

Time Frame for working out the resolution plan

The RBI has allowed the lenders time till 31 December to work out the resolution plans on restructuring without classifying the borrower accounts as Non Performing Assets. Also, there are another 90 days until 31 March to implement the resolution plans. 

The RBI has also formed a committee under K V Kamath who will finalise the modalities, identify sectors and set parameters for the restructuring scheme that will be implemented by the banks and NBFCs. 

We would like to tell you that you should think of restructuring your loan only if you are facing extreme financial difficulties as your interest burden will increase with any loan restructuring. 

A note to all our Money View Loan customers

We would communicate with you on how you could avail the facility if required, as soon as we get details on the modalities of the restructuring plan from RBI and our lending partners.