Loan Moratorium Ends: What Can Borrowers Do Next?

In the month of March 2020, the Reserve Bank of India (RBI) announced a loan moratorium for an initial period of 3 months to help reduce the debt burden on borrowers. According to the announcement, borrowers could technically defer the payment of their Equated Monthly Instalments (EMIs) for the specified period of 3 months. Taking into consideration the various financial issues faced by borrowers due to the pandemic, the moratorium period was subsequently further extended by another 3 months, till August 31, 2020.

 

With no official announcement of another extension from the RBI, the six-month long loan moratorium has now finally come to an end. This effectively means that borrowers would have to start paying their Equated Monthly Instalments (EMIs) once again from the 1st of September 2020. However, with respect to restarting the loan repayments, there do not appear to  be any clear guidelines in this regard.

 

The RBI has formed the Kamath committee, an exclusive five-member team headed by the former CEO of ICICI Bank Mr. K. V. Kamath for formulating loan restructuring parameters. However, there have not been any concrete developments so far. With no clear way out visible to borrowers, many are left confused and unsure of how to proceed with their loan repayments.

 

So, What are the Options Available for Borrowers

At the outset, there seem to be four primary options for borrowers who have opted for the six-month long EMI loan moratorium.

 

1. Borrowers may choose to pay all of the deferred EMIs along with the interest accrued during the moratorium through a single one-time payment.
2. Borrowers may choose to pay off only the interest accrued during the moratorium period through a single one-time payment.
3. Borrowers may choose to add the interest accrued during the moratorium period with the remaining amount of loan outstanding. This would bring about a change in the amount of EMIs to be paid by the borrowers.
4. Again, borrowers may choose to add the interest accrued during the moratorium period with the remaining loan outstanding amount. But unlike in the previous option, here, borrowers can opt for a longer loan tenure with the same EMI amount instead of paying an increased EMI amount.

In addition to the above alternatives, borrowers also have the option to convert the accrued interest into a different loan. This way, they wouldn’t have to contend with an increase in the EMIs or the tenure of the existing loan. Furthermore, borrowers, in consultation with their banks, could also opt for a separate restructuring scheme to help them with their loan repayment.

 

Interest upon Interest: Keeping an Eye on the Supreme Court Hearing

Since the interest on the deferred EMIs would continue to accrue, this would effectively give rise to a situation where interest is charged upon interest. The Supreme Court of India had previously expressed its displeasure with such a situation and a hearing was scheduled for September 1o, 2020 to discuss the waiving of interest for the extended loan moratorium period.

 

The Reserve Bank of India, in a reply to the apex court, stated that waiving the interest would lead to a loss for the lenders and have the effect of destabilizing the financial sector. The remainder of the hearing was then subsequently adjourned to September 28, 2020 to give the central government and the RBI enough time to come up with a concrete plan.          

It would be in the best interests of borrowers to monitor the proceedings of the Supreme Court hearing, since its verdict has the tendency to materially affect their loan repayment. If the SC rules in the favour of borrowers, the interest accrued during the moratorium period would be waived off, thereby significantly reducing the debt burden. Additionally, such a positive verdict might also prevent borrowers from having to opt for a loan restructuring scheme.

 

A Word to the Wise: Preparing for Resumption of Loan Repayment

As with any case pending before the judiciary, it could take quite a bit of time for the verdict to be announced. Therefore, it would be a good idea for borrowers to act immediately with respect to their loan repayments and not wait for the verdict of the Supreme Court. As of September 1, 2020, the loan moratorium period has officially come to an end and delaying loan repayments any further might put borrowers in trouble.

 

In the event of non-repayment of loan EMIs from September 1, 2020, lenders are obligated to report such defaulting borrowers to the credit bureaus. This can significantly affect the credit score of such borrowers and impede their chances of securing any other loans. And so, the best option would be to prepare for the resumption of EMI payments. If cash flows are quite stable, it is advisable for borrowers to start paying their EMIs forthwith.

 

Some experts even suggest making a one-time payment of all the deferred EMIs along with the accrued interest, if possible. This way, borrowers can reduce their debt burden significantly with zero change in their loan repayment schedule. Furthermore, another set of experts suggest taking out a secured loan backed by a collateral to close out any unsecured loans that borrowers might have opted for the moratorium. You can calculate your EMI using a personal loan EMI calculator.

Another Alternative: Restructuring of Loans

Restructuring of loans allows borrowers to delay the repayment of the principal and the interest components of a loan. Additionally, when compared to the original loan scheme, it also allows them to pay back the loans taken under easier and more relaxed terms. Borrowers aren’t the only ones who benefit from loan restructuring schemes. Even lenders gain a whole lot from it, since it gives them a lot of freedom and flexibility. Restructuring of loans also keeps Non-Performing Assets (NPAs) from increasing, which in the current situation is the need of the hour for banks and financial institutions.

 

With respect to loan restructuring, it remains to be seen as to what the Kamath committee recommends. Most experts believe that the committee would put the onus on the lenders and the borrowers to come up with a one-time restructuring plan that suits both the parties.

 

That said, the procedure for restructuring of loans is likely to involve either one or a combination of the following actions.

 

1. Rescheduling of loan repayments
2. Conversion of the accrued interest into a new loan
3. Extension of the tenure of the loan
4. Extension of the moratorium period of existing loans by up to two years
5. Stepping up of EMIs, where the borrower pays a lower amount of EMI for a few months and gradually increases the amount of EMIs as time passes

For borrowers, the right way to go about this situation is to try and settle the deferred EMIs including any interest that might have accrued during the moratorium period. Despite the apparent financial burden, this is the option that would cause the least amount of penal repercussions. Also, by settling the dues as soon as possible, borrowers can bounce back on track much faster.

 

For borrowers looking for other sources of income or funds to repay their loans, one way out is to book profits on any mutual fund or equity investments they may hold. The gains derived from the sale of such investments can help repay the outstanding loan amounts. And while loan restructuring can help borrowers out, it is advisable to use this route only after exhausting all the other options.