Why opting for loan moratorium is double-edged sword for retail customers?
Loan moratorium now stands extended to Aug 31 2020 from existing May 31 2020 as per latest RBI guidelines. The focus of moratorium 2.0 is to provide a relief to Banks / NBFCs by delaying NPA recognition for 6 months and also to most vulnerable group of people like self-employed & people working for worst affected sectors like hospitality.
But should a retail customer really avail this? The answer is simple there are no free lunches and customer should opt for it only if he is willing to bear the costs. Let’s discuss this in details.
First of all, this is a moratorium not a waiver so interest will continue to be applicable for this period. And in some cases, there will be interest on interest which can really be a huge burden for customers once the moratorium period ends.
Secondly It can also impact customers’ ability to avail loans in future as credit decisions these days are machine driven and algorithmic and one of the data points that will play a key role is whether a customer applied for moratorium or not. As opting for moratorium in a way raises question over ability to pay for a particular customer.
Banks and NBFCs have exercised discretion in providing moratorium option to its customers. In general, they have not extended it to customers with shorter loan duration and those they perceive as high risk.
Depending on loan product a customer can take following decisions:
1) Short Term App based loans: These are high interest loans with tenure of roughly 3 months and generally can be reapplied within 48 hours after repayments. The ideal approach for customer would be to meet these emi on due date and re-apply if they need a fresh one.
2) Credit Cards: Finance charges on outstanding credit card dues go up to 49% per annum. Customer can explore converting these dues into emi at a lower interest rate.
3) Two-wheeler & Consumer durable loans: These are loans with duration of up to 1 year. Monthly emi burdens are generally fraction of customer income for these loans so it is better to clear these loans.
4) Car Loan & Personal Loan: These are loans with tenure ranging from 3–5 years. Customer depending upon his current repayment capacity can take a call for opting for extended loan moratorium.
5) Home Loan: Home loan emi contributes significantly to a customer’s monthly expense bill. These are low APR and high tenure loans. A customer facing cash crunch can opt for moratorium and financially plan to get rid of this added burden in months to come.
The current lockdown conditions are really challenging. Customers have witnessed salary reductions and job terminations. Such customers may need some time to stabilise their financial conditions. But on a brighter side there has also been reduction in discretionary spending. So, with a little financing planning a customer can come out as a winner from these circumstances.