It has been sufficiently emphasized that the postponement of equivalent monthly payments (IEM) —through the moratorium facility provided by the Reserve Bank of India (RBI) until the end of August — will lead to an increase in the total interest cost of the loan. However, there is another unintended consequence of using the moratorium facility: the rejection of new loan applications. In fact, in some cases even loans that were already sanctioned but not disbursed were canceled for borrowers who opted for the moratorium facility.
“Some lenders have put borrowers with a moratorium on their negative list. This affects new claims as well as sanctioned but undisbursed cases, ”said Aditya Mishra, founder and CEO of Switchme.in, a platform that helps borrowers transfer their home loans to other financial institutions.
RBI, while announcing the moratorium, had categorically affirmed that the opting will have no impact on the credit rating of borrowers. So why do banks refuse loans to borrowers? We help you understand this and the solution.
Why is this happening?
When a bank grants a loan, it assesses the borrower’s repayment capacity, in addition to examining the credit rating. A borrower who opts for the moratorium facility has effectively accepted the fact that he is facing a financial crisis and is unable to repay his existing loan.
“The ability and intention (of the borrower) are key criteria for banks when taking out loan applications. The use of the moratorium has an impact on the customer “capacity” factor. To avoid taking unnecessary risks in these uncertain times, many banks have rejected requests where customers have opted for a moratorium, ”said Raj Khosla, managing director of MyMoneyMantra.com, a financial services provider.
“Someone who has opted for a moratorium is probably facing a short-term cash shortage. Therefore, banks would be cautious in lending to such people immediately, ”said Gaurav Gupta, CEO of MyLoanCare.
In the event of sanctioned loans, banks reassess borrowers’ repayment capacity before disbursing them. “Any sanction is valid for a limited period and also under certain conditions. Sanctions are canceled if the time limit expires or if the conditions are not met. Common conditions include non-payment of an existing loan, adding a co-applicant as a co-owner of the property, and providing documents indicating receipt of certain income. In general, if some time has elapsed between sanction and disbursement, lenders will complete the entire sanction process at the time of disbursement. This is where they check moratoriums and pay cuts and review sanction letters, ”Mishra said.
The involuntary victims
According to press reports, nearly 20% of borrowers from State Bank of India and 90% of borrowers from Bank of Baroda have opted for the moratorium facility. IDBI Bank said 65% of its customers did not “want” the moratorium facility. There is no industry-wide data yet.
But many of them may have opted for the moratorium facility either inadvertently or because of the current uncertainty and not because of a lack of liquidity. Borrowers who are not warned may have failed to opt out of the moratorium, a requirement of some banks.
“A lot of people who didn’t need a moratorium chose it. The communication that took place in the first days after the announcement was not very clear. Then each lender came up with a different set of rules for the moratorium. In addition to the generally high levels of uncertainty and anxiety at the end of March, it was difficult for customers to decipher and make a sound call. Many sought to preserve liquidity even if they had the means to repay, ”Khosla said.
Experts say the rejection of loan applications from borrowers who have opted for the moratorium may be a temporary phenomenon. “Lenders would like to see the borrower’s ability to service IMEs. Since there is no precedent for a regulatory moratorium, there may not yet be a clear policy on the cool-down period. However, from a risk management perspective, it is likely that the borrower will need to regularly maintain EMIs for at least six months before banks can resume lending to them, ”Gupta said.
In addition, there will be no impact on the credit rating of borrowers. “We are working with lenders to ensure that moratorium data is communicated to us according to RBI guidelines,” said Sujata Ahlawat, vice president and manager, direct to interactive consumers, TransUnion CIBIL.
People with sufficient liquidity should opt out of the moratorium in accordance with their bank’s rules. Also, it makes sense to prepay as much of the loan as possible. Mishra suggests borrowers could explain to the bank why they opted for the moratorium even if they didn’t need to. “They can show their pay slips and bank statements to show they had funds to serve the EMI,” Mishra said.
Ideally, you should avoid debt in these uncertain times. Remember that if you are not able to repair your NDEs after the moratorium period ends, your credit score will be affected. So opt for this only if you have no other way out.
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