Explained: How Moratorium 2.0 will impact your creditworthiness

Siddharth Gupta

The Reserve Bank of India recently announced Moratorium 2.0 and borrowers can choose to defer their EMIs for a further period of three months, i.e. from  June 20  to August 20. Moratorium 1.0 was announced earlier for a period of three months,  from March 20 to May 20.

While this may sound like a big relief,  and the first instinct would be to rush for Moratorium  2.0,  it is important to consider the pros and cons before doing so. In this blog, I am putting down some of our learnings from Moratorium 1.0 and some of the questions raised to us over the last two days.

What have we learned from Moratorium 1.0? Will it impact an individual’s capability to raise debt in the near future?

In theory, opting for EMI moratorium will not impact your creditworthiness, which means, you will not be reported as an NPA or no adverse reporting will happen to Cibil.

However, it is certain to impact your debt raising capabilities in the short term. In the next three to 12 months, bankers are likely to be cautious, while sanctioning EMI-based credit facilities to borrowers who have availed EMI moratorium.

Based  on  my  discussions  with  various  bankers,  we  have  been  able  to  identify  two key concerns:

1. Uncertainty on your capability to handle the full burden of your EMIs after the moratorium.

How can the banks take such an illogical view when the moratorium was announced by the RBI?

The above concerns may sound illogical, and one can argue that the decision to opt for the moratorium was because of the unprecedented uncertainty and it is not an indicator of the strength of your business.  However, the banks are not in the business of helping you in your hour of need and they will be happy to err on the side of caution. They are justified to be cautious, about how your business will perform in a scenario where COVID is likely to stay with us for a while and partial lockdowns may return.

What kind of loans will be most impacted on account of the moratorium?

The moratorium will more likely impact the underwriting of retail loans more as compared to corporate loans. The following type of loans will be most impacted in that order:

Personal Loans
Unsecured Business Loans
Loan against Property
Home Loan Top-ups
Fresh Home loans

I did not have any pressing cash flow issues but had opted for Moratorium  1.0 because of the prevailing uncertainty. What should I do now?

 One of the most common reasons for opting for Moratorium 1.0 was uncertainties about the length of the lockdown and its impact on businesses. Now that lockdown is being relaxed and some bit of visibility is coming back,  it would be prudent not to opt for moratorium 2.0 if you do not have any pressing cash flow issues.

I did not opt for Moratorium 1.0 on any of my loans. Should I opt for moratorium now?

Opting for moratorium has a financial cost (You can read more about it here. If you have cash flow problems and foresee that you may not be able to fulfil your obligations,  please feel free to opt for moratorium.  It is much better than defaulting on your EMIs.

However,   please be aware that opting for Moratorium 2.0 will impact your credibility more than the previous version.

I opted for  Moratorium  1.0  on all my loans and would like to opt for  Moratorium 2.0 as well. How will it impact my credibility?

If you have opted for both Moratorium  1.0  and  2.0  on all your loans,  it would mean that you would not be paying EMIs for 5/6 months. In such a scenario, it will be fair to expect that you won't be able to avail EMI-based credit facility for at least 12 months from good banks.  Underwriters would like to see your repayment record for  6  to  9  months after the moratorium is over before lending you further.

What alternative do I have, to manage my cash flows if  I do not opt for Moratorium 2.0?

If you are running a  Working  Capital  Facility or any other term loans in your business,  reach out to your Bank/  NBFC.  Check if you are eligible for the additional top-up loan under the  Emergency  Credit  Line  Guarantee  Scheme (ECLGS) announced by the government recently for  MSMEs. If you are eligible, it would be advisable to opt for that to manage your cash flows, instead of opting for Moratorium.

What should I be aware of, before opting for the top-up under ECLGS over an EMI Moratorium?

A preliminary review of the scheme suggests after the moratorium of first year, the loan will have to be repaid in three years. This means a principal repayment of Rs 8.33 lakh per year plus interest. It would result in a  tentative monthly cash outflow of Rs 80,000 (appx) after 1 year on a Rs 25 lakh loan.

Siddharth Gupta is the founder and CEO of BiggPocket, a start-up facilitating mortgage and unsecured loans for retail borrowers.