RBI Extends EMI Moratorium Period by Three months, Cuts Repo Rate Cut by 0.4% – Know the Impact

EMI moratorium period by RBI: Reserve Bank of India Governor Shaktikanta Das in his press conference today announced a cut in the repo rate by 0.4 per cent, which now stands at 4 per cent. Subsequently, the reverse repo rate was reduced to 3.35 per cent. The RBI had cut repo rate by 75 basis points in March and also announced several liquidity measures amidst the COVID-19 outbreak. Besides cutting the repo rate, the RBI has also extended the moratorium period by another three months.

Home loans

After the repo rate cut and with the cost of funds coming down for banks, borrowers will stand to gain as the EMIs on their home loan and car loan are expected to fall. If you are a borrower with a loan linked to Marginal Cost of Funds based Lending Rate (MCLR), the fall in MCLR will help you pay lower EMIs on your loan as and when their reset-period comes up. Currently (from October 1, 2019), loans, including home and auto loans, offered by banks, are linked to an external benchmark, which for most banks is the RBI repo rate.

As and when there is a revision in the repo rate, the home loan interest rate for the borrower gets revised within three months. The transmission, therefore, is expected to be faster in repo-linked home loans than on the loans linked to MCLR – an internal benchmark of banks.

Let us see how a 75 basis points or 0.75 per cent cut in home loan interest rates impacts your EMI and total interest cost.

Assuming one takes a home loan of Rs 35 lakh for 15 years, the savings in EMI and interest will be:

· EMI Saved – Rs 1533 ( Annually Rs 18,396)

· Total interest saved – Rs 2.76 lakh

Moratorium period – extension

The moratorium period has also been extended by 3 months till August 31. Earlier, the Reserve Bank of India had announced a three-month moratorium on all term loans outstanding as on March 1, 2020. For EMI-based term loans, it will be three EMIs falling due between 1st March 2020 and May 31st, 2020, which now stands extended till August 31, 2020. The move is expected to ease the liquidity constraints of borrowers.

During the moratorium period, the borrower need not pay the EMIs but that will not mean that the EMIs are waived off. The borrower of home loan, car loan or the credit card user has to pay the accrued interest at the end of the moratorium period.

So, essentially the moratorium helps in deferring the instalments but the interest burden actually accumulates over the period. It’s better not to avail the moratorium and choose to pay on time unless one is hard-pressed for funds.