What is the use of the 3-month moratorium announced by RBI with regards to Covid-19, as taking that option looks like we have to pay thrice the EMI back later?*
To be precise, RBI has permitted banks to allow a moratorium of up to three months in EMI payments. RBI has not advised / requested / mandated banks to provide any moratorium.
It’s really up to individual banks to decide whether they want to offer a moratorium at all, if so, for how many months and decide the modalities thereof such as interest mode, automatic deferrment for everyone or deferrment only based on opt-in by specific borrower, etc.
On the back of RBI’s permission, one bank has offered a moratorium for two months basis opt-in. Another initially offered automatic deferrment for three months but has later changed it to opt-in. Another bank has not offered any moratorium when I last heard a few days ago.
Under normal conditions, if a borrower fails to pay three EMIs consecutively, for whatever reason, they will be declared as defaulter and the lender can commence recovery process and post negative updates to their credit rating.
Now, to understand the use of the moratorium, let’s take the baseline case of a bank offering three months moratorium. Borrowers of this bank who skip three consecutive EMIs will not be declared as defaulters, will not invite recovery process and will not trigger negative updates to their credit rating. That’s a huge lifeline for borrowers who’re unable to make their loan repayments because of the current crisis.
Moratorium is not waiver of either principle or interest. So skipped EMIs have to be paid back later. Also, since interest will still be levied during the said three months, it’s also conceivable that the accumulated-and-unpaid interest may become quite substantial. In that case, that component could itself turn into one or more additional EMIs.
If a borrower opts in for deferrment of EMIs by three months, the tenure of their loan will get extended by three months but, in the case of longer tenor loans, it could also be more than three months.
In short, this moratorium is not a potential source of boosting returns on personal finances. By understanding its true purpose of being a lifeboat, a lot of confusion can be avoided.
*: This is the original question I answered. I’m repeating it to help me make sense of my answer in case it’s moved to / merged with some other question that I didn’t answer.