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Homechevron_rightBusinesschevron_rightEMI payments on loans...

EMI payments on loans across spectrum eligible for 3-month stay

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EMI payments on loans across spectrum eligible for 3-month stay
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New Delhi: In a major relief to auto and home loan borrowers, the RBI on Friday permitted lenders, including banks and NBFCs, the power to impose a three-month moratorium on EMIs of borrowers on loans that they have disbursed.

RBI Governor Shaktikanta Das said on Friday: "All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India financial institutions, and NBFCs (including housing finance companies and micro-finance institutions) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020."

In financial parlance, term loans includes home, personal, education, auto and any loans that have a fixed tenure. Effectively, all term loans should be outstanding as of March 1, 2020 to get the three-month moratorium.

Beside the moratorium, the MPC of the RBI voted to massively reduce the key lending rates, thereby, further lowering the EMI burden on borrowers.

This would depend on when the banks pass on the benefit of lower interest to customers.

Accordingly, the Monetary Policy Committee of the central bank in an unscheduled meeting reduced the repo rate, the key interest rate at which the RBI lends short-term funds to commercial banks, by 75 basis points to 4.40 per cent from 5.15 per cent.

Consequently, the reverse repo rate was also reduced by 90 basis points to 4 per cent.

Apart from retail loans, corporates and MSMEs will also benefit from deferment on EMI repayments on term loans.

The apex bank also announced deferment of interest payment on working capital loans by three months.

The twin move is expected to reduce pressure on both creditors and borrowers as the former gets relief on qualifying loans as NPAs and thereby increase provisioning for a period of three months.

For borrowers facing disruptions on account of Covid-19 pandemic, the RBI move provides more time to settle their dues.

"All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India financial institutions and NBFCs (including housing finance companies and micro-finance institutions) (lending institutions) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020," RBI governor Shaktikanta Das said while announcing a series of liquidity measures after the monetary policy committee (MPC) meeting.

Accordingly, the move is expected to alleviate concerns over the possible short-term delinquency in retail, MSME or corporate loans.

"It's really important that steps are taken to mitigate the burden of debt servicing brought about by disruptions on account of the Covid- 19 pandemic. These steps will go a long way to prevent the transmission of financial stress to the real economy and ensure the continuity of businesses and provide relief to borrowers in these extraordinary times," Das said.

Deferment of interest payment and instalment of term loans has been one of the demands of India Inc. due to extreme conditions presented by the spread of the virus. It will allow companies to continue with their investment plan to tide over the current situation without bothering about loan repayment for a three-month period.

For banks, which faced financial stress in the last few months, the move would not add up to their woes as RBI has taken enough measures to infuse liquidity in the banking system. Moreover, they would also not add up NPAs in the three-month period.

The moratorium on loan repayment will cover all commercial banks, including regional rural banks, small finance banks, and local Indian banks, cooperative banks, all India financial institutions and NBFCs, including housing finance companies and micro finance institutions.

Das said while interest payment on working capital loans is being deferred, the accumulated interest for the period will be paid after expiry of the period. The same will also hold true for term loans that would need to repaid after three-month moratorium. No additional interest would be charged on loans that are not repaid for next three months.

Das said the measures would not result in asset classification downgrade. It is also expected that moratorium and deferment may not also result in rating downgrade by agencies.

In addition, the RBI eased Working Capital Financing norms. "The moratorium on term loans, the deferring of interest payments on working capital and the easing of working capital financing will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions," Das said.

"Hence, there will be no adverse impact on the credit history of the beneficiaries. The RBI move will address the short-term delinquency concerns in retail, MSME or corporate loans. This will also be a significant relief for the NBFC and the MFI sector whose operations are likely to be very severely impacted in this lockdown period," Suman Chowdhury, President, Ratings, Acuit Ratings & Research Limited said.

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