EMI moratorium by banks: Non-uniform implementation raises questions

EMI moratorium by banks: Non-uniform implementation raises questions

There are three repayment options for a borrower who is opting for a moratorium based on the accrued interest and principal amount or the deferred EMIs

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The Reserve Bank of India may have come to the rescue of coronavirus-affected borrowers by granting the three-month moratorium on term loans, there is a need for a clear and effective communication. Although banks have started offering the EMI holiday, they are not treating it in a similar fashion in terms of who needs it and how to recover it post the moratorium period.

Take, for instance, the moratorium scheme by the private lender ICICI Bank gives a message that a self employed or a rural and semi-urban customer needs it more desperately than a metro-urban credit card customer. So, they are offering an automatic moratorium option to all those customers. The bank has broadly divided the borrowers into two buckets of self employed or borrowers of a tractor loan and agri loans and a metro or more urban centric borrower of a home, car and a credit card. The former gets a default option of moratorium without filling any form or indicating his intention or the choices whereas the latter has to opt for a moratorium by clicking on a bank's link.

This in contrast to high street Standard Chartered Bank, a more metro and urban centric bank, which has decided to give a default option of moratorium to all its home loan customers. A default option means even if you have the capacity to pay, the bank is offering you a moratorium option. The onus is on borrowers to tell the bank that they don't need it. Quite strange.

Why different criterion for a same set of metro and more urban customers? Clearly, the trigger for a moratorium should be the default by any borrower whether metro, urban or  rural. A loan default should automatically shift the outstanding to a three-month moratorium.

The Repayment Options

Broadly, there are three repayment options for a borrower who is opting for a moratorium based on the accrued interest and principal amount or the deferred EMIs. First, the extension of tenor without changing the current EMI. Second, a revised EMI within the existing tenor. Third, revising the EMIs slightly and also extending the tenor by only three months of moratorium period. The banks are actually going for two options, though communication is still hazy in some cases.

Take for instance, the LIC-owned IDBI Bank is very clear in its communication that the EMIs will be revised slightly and the tenor will be extended by the moratorium period of three months. Let's take an example of Rs 20 lakh home loan with interest rate of 8.25 per cent per annum, current EMI of Rs 17,041 and existing tenor of 180 months. The three-month moratorium option for IDBI Bank's home loan borrower will make the new EMI of Rs 17,393 , a rise of Rs 352 per month , with tenor extending by only three months, that is, 183 months.  Therefore, there is no ambiguity in the bank's communication to borrowers.

Many private banks are not increasing the existing EMI, but extending the tenor of the loan. The private sector IndusInd Bank and IDFC First Bank have clearly stated that there will be no revision in the current EMIs while the tenor will be extended accordingly. This doesn't increase the borrowers' outgo immediately, but puts a burden of increasing the tenor by more than three months.

The communication from the country's largest bank , State Bank of India, however, raises some queries. In its FAQs on whether deferment of EMI will result in increase of future EMI amounts, the bank says that the customers will pay usual EMIs from June onwards as per the original repayment schedule, which will be extended by three months.

If one pays the original lower EMIs, it means, the borrower has to pay the total outstanding amount (interest on deferred amount) in three equal instalments post the end of original tenor. The bank in the very next line says 'due to interest on deferred EMI, the amount of remaining EMI or the number of EMIs may change'. This statement means that the bank EMIs will either be revised or the number of EMIs (tenor) may change.

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