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If you are running any EMI based loan such as a Home Loan or a Loan Against Property or an Unsecured Business Loan or a personal loan and are excited about all the talks of a 3-month EMI Moratorium that has been going around, brace yourself!!

Out of the 3 EMIs which are eligible for moratorium, you may have already paid one and may be eligible for just a 2-EMI break.

1. Why do you say that the EMI Moratorium is effectively for 2 months?

The RBI circular number RBI/2019-20/ 186 DOR.No.BP.BC.47/21.04.048/2019-20 clearly states that banks and financial institutions "are permitted to grant a moratorium of three months on payment of all instalments1 falling due between March 1, 2020 and May 31, 2020". This implies that only the EMIs which are supposed to be debited from the borrower’s accounts in the month of March, April and May 2020 are eligible to moratorium.

Now this circular was issued on the 27th of March 2020. EMIs for almost all car loans, home loans, unsecured business loans and personal loans for the month of March 2020 would have been already debited from the borrower’s bank accounts (particularly in the case of NACH debits). If the bank accounts of the borrowers had enough balance, and these EMIs have been cleared, this would mean that these borrowers are eligible only for a Moratorium of April and May 20 EMIs i.e. 2 EMIs only.

2. Why is everybody around me saying that the EMI moratorium is for 3 months?

As mentioned above, RBI has permitted banks to grant moratorium to instalments falling due between March 1, 2020 and May 31, 2020. Therefore, the benefit of 3-months is available to the following:

• Borrowers, whose EMIs for March 2020 have remained unpaid either because they have already bounced/ returned unpaid even before the announcement was made
• Borrowers running working capital facilities – the interest for working capital facilities is typically debited by the bank on the last day of the month
• Borrowers, whose EMI for the month of March 2020 was payable after 27th March and these EMIs have been stopped by the bank.

3. Will the banks refund the EMI of March 2020, which has been debited from my account, if I opt for a 3-month moratorium?

No clarity on this has been provided either by the RBI or any of the banks. However, it is unlikely that an EMI refund would happen.

Link to RBI Circular: https://m.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=11835

Are you running a Home Loan or a Loan Against Property , car loan or an Unsecured Business Loan and are wondering what does the announcements by RBI on 27th March 2020 (Covid Package) mean for me?

Based on the common questions received by us from a vast number of clients, we have tried to compile a FAQ for your reference.

1. Does the announcement by RBI mean, that you will save on your Interest cost??

NO. This announcement by the Reserve Bank of India DOES NOT mean that you save on your Interest costs. This is not an EMI Holiday.

RBI has announced an "EMI Moratorium". This means that you may not pay your EMIs during the Moratorium period. However, the interest cost will still be incurred. The RBI circular in this regard clearly mentions "The Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period".

To illustrate, lets us assume that the Principal Outstanding on your home loan is INR 1,00,00,000 (One Crore) as on date and your loan carries an interest rate of 9%. This would mean that your interest cost is INR 75,000 per month. If you are granted a 3-month Moratorium, at the end of 3 months, the principal outstanding of your loan would become INR 1,02,25,000 and your EMI repayments will start accordingly. 

(We have ignored the potential impact of compounding during the moratorium period in the above illustration)

2. Should I opt for the EMI Moratorium? Does it help me?

As illustrated above, EMI moratorium is not a savings in your interest costs. It is infact, like availing a top-up loan (of equal to 3 EMIs) on your current loan. You will be paying interest on this top-loan as well.

Therefore, it is just a liquidity management tool. You must avail of the EMI moratorium only if you have current or potential cash flows issues and the moratorium will help you tide-over these cash flow issues.

Continuing the above illustration, assuming that your balance tenure was 20 years and your EMI was INR 89,973. If you have opted for the 3-month EMI moratorium, you will save a cash flow of INR 269,919. Effectively, this savings in cash flow over is just like taking a loan today from the bank for INR 269,919. If a fresh loan of INR 269,919 is offered by your bank today, and you think you will take it because that will help you in your business or personal expenses, you should opt for the Moratorium.

If you will not accept the bank’s offer for this loan, you should not opt for the EMI moratorium.

3. Can you illustrate, what happens to my interest cost if I opt for Moratorium?

As you can see from the below illustration, if you opt for Moratorium, your interest cost goes up by INR 2.6 lakhs to INR 12.14 lakhs depending on the option you chose.

Scenario 1: At the end of the moratorium period of 3 months, your EMI increases, and your tenure remains at 240 months (the current balance tenure).

Scenario 2: At the end of the moratorium period of 3 months, your EMI remains unchanged and your balance tenure increases.

(We have ignored the potential impact of compounding during the moratorium period in the above illustration. We have also ignored the impact of potential Reduction in EMIs as a result of rate reduction measures announced by RBI because these would be available, whether or not you opt for moratorium)

4. Will my EMI increase if I opt for the EMI Moratorium?

Yes. The RBI circular mentions that "the repayment schedule for such loans as also the residual tenor, will be shifted across the board by 3 months after the moratorium period". This clearly implies that banks have to limit the increase in tenor to 3 months.  Mathematically, that cannot happen unless the EMI increases because the interest during moratorium period will get added to the principal outstanding. So, in the illustration mentioned above in Point 3, Scenario 1 (where EMI increases to INR 91,997 from INR 89,973) will become an automatic choice.  

(We have ignored the impact of potential Reduction in EMIs as a result of rate reduction measures announced by RBI because these would be available, whether or not you opt for moratorium.)

5. Is it compulsory for the banks to grant the EMI Moratorium?

No. RBI has simply permitted the banks/ financial institutions to grant a 3-month moratorium. It is the discretion of individual banks to allow or not allow such a moratorium.

6. Has any bank announced EMI moratorium yet?

Media reports suggest, that SBI chairman has announced that they will provide moratorium to their borrowers. However, the exact specifics on the implementation of the same will be worked out in due course.

7. How do I avail the EMI Moratorium? What is the process?

Most banks other than SBI are yet to announce their stand on the EMI moratorium. It has Under the current situation, if you want to avail of EMI moratorium, it is advisable to write to your bank and document your request along with your situation (Closure of business activity/ job loss/ pay cut etc resulting from the Corona Virus disruption). This would help the bank to consider your request once they have finalised the mechanics around it.

8. If I opt for moratorium, do I have to pay 4 EMIs at the end of 3 months?

No. You will not be required to pay 4 EMIs at the end of 3 months. Your EMIs will re-start after 3 months and the tenure of your loan will shift by 3 months. For instance, if your home loan was originally supposed to end in March 2040, it will not get over in June 2040.

9. My EMI is due on 1st April 2020. Will the EMI be deducted from my account?

Even if your bank agrees to provide EMI Moratorium to you, the process of implementing it may take a while. This means that if your next EMI date is in the 1st week of April, the EMI may be debited to your account.

10. Can my bank offer EMI moratorium to me?

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) are permitted to grant the EMI Moratorium.

Link to RBI Circular: https://m.rbi.org.in/scripts/BS_Circular IndexDisplay.aspx?Id=11835

[This version is dated 28th March 2020. We shall continue to update and modify this further based on developments and announcements from various banks.]

Related Blog = EMI Moratorium: Is it really 3 Months??

Getting a home loan sometimes can be as difficult as buying a new home. While each lender may have their own criteria of evaluating a home loan application, here are few factors that almost all Banks/NBFC’s consider.

Disposable Income 

Your disposable income or is the most important criteria for your home loan appraisal. It is that portion of your total income which can be utilised by you for payment of EMIs. Typically, Banks/NBFC’s consider 50 to 75% of your total income as your EMI repayment capacity.

Higher Disposable Income => Higher EMI Repayment Capacity => Higher Loan Eligibility

In addition to your salary or business income, it is always better to provide details of any additional income from rent, interest or dividends at the time of making the application. This will help you in getting a higher sanction in lesser time and without any hassles.

Adding your spouse or children (who generate any income) as joint applicants to the loan can further enhance your loan eligibility.

Existing EMIs

A Home Loan of Rs.20 lakhs with an EMI of Rs. 18,000 does not impact your loan eligibility as much as a personal loan of Rs.10 lakhs with an EMI of Rs. 25,000.

It is not the amount of loan but the EMI that you are paying which reduces your loan eligibility.

Higher Existing EMIs => Lower EMI Repayment Capacity of the applied loan => Lower Loan Eligibility

Serving many EMIs of consumer loans or personal loans that aggregate to a large amount may even result in a decline of your home loan application.

Credit History

Banks/NBFC's judge your credit history through your credit score. A low credit score may reduce the chance of securing a home loan or lead to higher rates. Most banks rely on CIBIL (Credit Bureau of India Limited) for studying the credit score and credit history of a prospective borrower. The overwhelming popularity of CIBIL has led to credit score being referred to as CIBIL score in common parlance.

Usually a CIBIL score of 750 or more is considered a good credit score for all types of loans. However, most banks will be willing to give home loans to applicants with a CIBIL score of more than 650.

Many factors impact CIBIL score adversely. However, 2 of the most common such factors include:

1. Overdues (Payments not made beyond the due date) on any credit card or loan account

2. Many CIBIL enquiries resulting from too many loan applications in a short time span

Property Verification

Property verification is the most complex part of the loan appraisal process. Generally, it has 2 aspects:

1. Legal Norms: This involves carrying out an ownership search for the property with the registrar or with the builder (in case of under construction property). Banks will lend only if the property being mortgaged has a clear and valid title. 

2. Technical Norms: This involves establishing the market value of the property and checking whether the property has been constructed as approved by the local authority. In case of independent houses, villas or builder floors, sanction map may have to be provided for technical assessment.

Age

Your age determines the tenor for which the bank will lend. Loan tenor is determined by the balance working life of the applicants/co-applicants. However, the maximum tenor that the banks lend for is 30 years.

For Salaried applicant, working life is determined by the retirement age of your current employer. However, some banks take a standard retirement age of 60 or 65 years. For businessmen and self-employed professionals most banks take a standard retirement age of 65 to 70 years.

Lesser Age => Higher tenor => Higher loan eligibility.

Work Experience and Occupation Stability:

Continuous work experience of at least 2 years is required for salaried applicants. For businessmen or self-employed professionals, a 5-year business continuity is desired. Switching too many jobs or businesses during your career may have a negative impression on Banks/NBFC's.

Salaried applicants working with large companies, PSUs and government departments or professionals like Doctors and Chartered Accountants are the most preferred borrowers. Loans to businessmen and employees of small companies normally involve more due-diligence.

Within each of the above factors, Banks/NBFC's have created a complex web, where one unfavourable factor may be offset by another more than favourable factor. For instance, a frequent change in jobs can be offset by a high salary. This web is often referred to as “Credit Policy” and is often not understood by most "Mortgage Advisors" or "Sales Representatives" of Banks/NBFC's. This leaves the borrowers completely clueless when the loan application gets delayed or rejected. A broad understanding of the above factors gives you a good starting point to question your advisor on various aspects and helps you chose a lender which is likely to process your application favourably.