Moratorium on Term loans : Should you Opt?

Recently, RBI increases the moratorium on term loans for a period of another 3 months. Thus, making it a total period of 6 months from 1st March, 2020 to 31st Aug, 2020.

Moratorium is a temporary postponement of payment of EMI (including both principal and interest components). But interest will accrue during this moratorium period and would be added to the principal amount which will ultimately increase either the EMI amount itself or the residual tenure of the loan.

Let's understand the same with an example

Say, a person is having a home loan of Rs 20,00,000 @8.5% for a period of 15 years or 180 months ( EMI in this case will be Rs 19,695). Now, if the person opts for above moratorium he's not required to pay any EMIs due until Aug 31, 2020.

At the end of 6 months, the interest for the 6 months i.e. Rs 85,000 (Rs 20,00,000 * 8.5% * 0.5 years) will be added to the loan amount, Therefore, the loan outstanding at the end of 6 months will become Rs 20,85,000.

Now, person has one of the two options below:

• Keeping the tenure of loan same at 180 months, the EMI will increase to Rs 20,532 (an increase of Rs 837 per month) after the moratorium period. Over the course of 180 months, it will lead to an extra burden of Rs 1,50,660.

OR

• Keeping the EMI same and change the tenure, loan will now get paid in 196 months (approx). That is, there will be an increase in 16 EMIs over the original tenure. Therefore, extra burden in this case will be Rs 3,15,120.

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CONCLUSION

Once you avail the relief, you may not have to pay any EMIs due until Aug 31, 2020 but the interest on outstanding loan amount will keep accruing and ultimately leads to extra burden on the borrower.

I understand that the lock-down will affect the cashflows of many of us very hard but from the financial planning perspective, one must not avail the deferment of EMI if one can afford the EMIs. However, if one opts for the given relief, try to increase the EMI amount by keeping the tenure of loan same as extra burden in this case is less as compared to another option.

Hopes this explains you the complete picture of moratorium. I trust your Judgement!!

Key Highlights of Press Conference by RBI Governor Shaktikanta Das on 22nd May, 2020

• RBI reduces repo rate by 40 basis points from 4.4% to 4% and reverse repo rate is now 3.35%.

• MPC (Monetary Policy Committee) inflation outlook highly uncertain due to the pandemic.

• GDP growth estimated to remain in negative territory.

• Private consumption has seen biggest blow due to COVID-19 outbreak, investment demand has halted.

• Industrial production shrank by close to 17% in March with manufacturing activity down by 21%.

• Inflation may remain firm in first half of year; ease in second half, falling below 4% in Q3/Q4 of FY21.

• Moratorium on term loans are extended for a further period of 3 months i.e. till 31st Aug, 2020.

• Measures announced can be delineated in 4 categories- Measures to improve markets, measures for exports/imports, measures to ease financial stress, measures to reduce state government's financial stress.

Clarification under section 269SU of the Income Tax Act, 1961

In a move towards a less-cash economy, a new provision namely Section 269SU was inserted in the Income Tax Act, 1961, vide the Finance (No.2) Act 2019. This section requires every person carrying on business and having sales/turnover/gross receipts from business of more than Rs50 crore in the immediately preceding previous year to mandatorily provide facilities for accepting payments through prescribed electronic modes .

Clarification issued by the Ministry of Finance

The Government issued a clarification vide notification no. 12/2020 dated 20.05.2020, stating that provisions of section 269SU of the Act shall not be applicable to a specified person having only B2B transactions (i.e. no transaction with retail customer/consumer) if at least 95% of aggregate of all amounts received during the previous year, including amount received for sales, turnover or gross receipts, are by any mode other than cash.

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Also find attached below the circular issued by Ministry of Finance.

circular_no_12_2020

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