With the COVID-19 pandemic spreading across the world, several sectors of the global economy are likely to be affected adversely by the lockdown. Aside from this, it’s inevitable that scores of small business owners are likely to face temporary losses or reduction in income. Taking cognizance of this unfavorable economic climate and its impact on businesses, the Reserve Bank of India (RBI) has announced an EMI moratorium on working capital facilities and credit facilities availed by businesses.
The moratorium period extends from March 1, 2020 to May 31, 2020. In simple terms, borrowers are not obligated to make their monthly EMI payments during this period. Once the moratorium period comes to an end, the repayment of instalments shall continue as per the original terms and conditions of the loan.
In this regard, the RBI’s directions can prove to be beneficial to business owners in the following ways. If you own a business and are worried about how to continue repaying your debt during these troubled times, here’s how the RBI moratorium for COVID-19 can benefit you.
Rescheduling of payments on working capital facilities
As a business owner, you may have availed working capital facilities from a bank or a financial institution to meet your working capital requirements and to finance your everyday operations. Now, with the possibility of a partial or complete reduction in your earnings due to COVID-19 pandemic, you may not have the funds to repay your debt as per schedule. The EMI moratorium allowed by the country’s central bank can be beneficial to you in a situation like this, because it permits lending institutions to defer the recovery of interest on working capital facilities.
This deferment is valid during the moratorium period, and it’s applicable on working capital facilities that have been sanctioned as cash credits or overdrafts. Bear in mind though, that the interest is only deferred, and it shall accrue over the moratorium period. After May 31, 2020, your lender is permitted to recover the accumulated interest.
Easing of working capital financing
When you avail working capital facilities, the lender takes into account factors like your working capital cycle. Your drawing power, which is effectively the limit up to which you can withdraw from the working capital sanctioned, is also determined by the lender. The RBI, in addition to the EMI moratorium, has also permitted lending institutions to ease these elements of working capital financing. So, your bank or NBFC can recalculate your drawing power by either reassessing the working capital cycle or by reducing margins. Some lenders may also decide to do both.
The RBI has specified that this benefit is only permitted as a means to help business owners get through the negative economic impact of the global pandemic. Your lender will need to establish that this benefit is essential for you to tide over the adverse financial impact arising on account of COVID-19 before establishing you as an eligible candidate for this allowance.
No adverse impact on your credit score
If your bank agrees to defer your interest on working capital facilities availed, you could be worried about how the moratorium could impact your CIBIL score. Fortunately, the RBI has also factored in this concern. And in this regard, the central bank has specifically mentioned that lending institutions should not treat the rescheduling of payments as a default on the part of the borrower. This holds true for the purpose of supervisory reporting and for the purpose of reporting to Credit Information Companies (CICs).
Essentially, this means that if you do not pay your EMIs during this moratorium period, your credit history and credit score will not be negatively affected, as long as your lender has permitted the deferment. Say if you’ve availed of any working capital loan, you can enjoy an EMI holiday for 3 months without worrying about your credit profile.
What should you do after the moratorium period for COVID-19 comes to an end?
Once the EMI moratorium period ceases, the accrued interest will need to be repaid. The ease with which you can meet this requirement depends, to a large extent, on the kind of business you run. If you deal with goods that are considered essential even during this nationwide lockdown, such as groceries, food supplies, or medicines, you may not have any trouble repaying your accumulated EMIs because your business might have been running largely unaffected even during this period.
On the other hand, if your business revolves around dispensable or luxury goods and services, the lockdown could cause a temporary lull in your monthly earnings. In this case, you could always tap into your reserves or cash in hand, if any, to meet the EMI repayments at the end of the moratorium period.
If you’ve availed of working capital facilities, you could be eligible for the benefits as per the RBI announcement if your business has been adversely impacted by the economic fallout owing to COVID-19. It’s important to ensure that you plan in advance to meet your dues once the moratorium period ends. That way, you can avoid any added charges and penalties, and also ensure that your credit score remains unaffected. During testing times like these, it’s also necessary to stay safe, practice respiratory hygiene, and follow the guidelines put out by the government, so that we succeed in flattening the curve and getting back to regular life.
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