Options for borrowers after the home loan moratorium ends

[ecis2016.org] What can a home loan borrower, who is in a difficult financial position due to the COVID-19 pandemic do, to pay the EMIs after the RBI’s loan moratorium ends? We examine some options

The home loan moratorium provided by banks, following the COVID-19 pandemic, came to an end on August 31, 2020. This facility was quite useful for individual borrowers who had taken home loans and were servicing EMI by paying almost 50% or more of their take-home salaries. Now with the end of the moratorium, the home loan borrowers, especially those who have either lost the jobs, or have been subjected to pay cuts, are facing real difficulty. This has also affected self-employed people, whose business has suffered heavily due to the Coronavirus pandemic.

You are reading: Options for borrowers after the home loan moratorium ends

What happens if you default on a home loan?

In case you are not able to service your home loan EMI for more than 90 days, your loan account is classified as a non-performing asset (NPA) by the bank. All the banks and financial institutions are under an obligation to report the transaction data of their borrowers, to a minimum four number of credit bureaus like CIBIL, which collate and complete the data of all the borrowers at one place and assign a credit score, based on the pattern of your transactions.

All the transactions relating to your loans, credit cards and loan inquiries, etc., are reported by such financial institutions to these credit bureaus. Delays and default in your loan payments seriously impair your credit history and credit score, which are indicators of your financial health. Once your credit history gets adversely affected, your ability to avail of any credit facility from the banking sector is also affected. So, before your home loan becomes an NPA, you have to proactively search for various alternatives.

How to pay the EMI after the RBI’s loan moratorium ends

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As a home loan borrower, you have three options, if you feel that it will be very difficult for you to service the huge home loan EMI in the foreseeable future.

Prepay a part of the home loan

In case you have some investments which can be liquidated easily and without incurring any major loss, this option works well for you, especially if your salary has been reduced or your business has been impacted due to the COVID-19 pandemic and you feel that you will not be able to service the huge EMI fully. In such a situation, approach your lender with an offer to partly pay your home loan, so that the EMI can be reduced to your comfort level. This option will work for you, only if you are sure that although the salary has been reduced, there is no chance of losing your job. In case you are apprehensive about losing your job this course of action is not advisable and you should preserve your cash and investments for the worst situation anticipated.

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Opt for banks’ loan restructuring schemes

The moratorium facility, between March 1, 2020 and August 31, 2020, was available to all the borrowers, irrespective of whether their cash flow was impacted due to COVID-19 or not. The Reserve Bank of India (RBI), in the first week of August 2020, issued a circular under which it has allowed all the lenders to formulate a restructuring scheme for all the borrowers who have been affected by the pandemic. Although the word used in the circular was personal loan, the intention was to cover all loans given to an individual, be it high-value home loans or gold loans or even low-value unsecured personal loans. Each institution will formulate its own scheme and get it approved by its board. The scheme so formulated, needs to have provision for additional extension of the home loan by two more years. The scheme should also provide for the creation of a separate credit facility, with respect to the interest outstanding on the home loan, in addition to reworking of tenure, interest rate and waiver of interest. Please note that this is not going to be an ongoing option, as the banks will have to close it by December 31, 2020. So, you have to act fast.

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There are two basic eligibility criteria for availing of the restructuring facility. The first criterion is that the ability of the borrower to service the home loan should have been affected due to COVID-19 and not due to other reasons. Secondly, the EMI on the home loan should not have been overdue for more than 30 days, as on March 1, 2020. Any home loan which is overdue for more than 30 days or has already become an NPA, will not be eligible for this facility. The facility can be availed of, irrespective of whether you had opted for the moratorium or not. Since the restructuring facility will have a provision for extension of the moratorium for two more years, this will be very good for those who feel that their situation will improve within two years.

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Sell the property

If you have lost your job or if your business has suffered tremendously and you do not see any chances of things being normal in the foreseeable future, you may have to consider putting your house on sale. This is particularly true in cases where the borrower feels he will not be able to service the EMIs, even after the maximum period of two years of moratorium available under the restructuring. In case you are not able to service your home loan, the lender has the right to take possession of the property and sell it and return the excess money, after adjusting the outstanding loan. In such a situation your lender may not get you the best price. Moreover, even if you decide to sell, it will be a distress sale and may not fetch the desired price.

(The author a tax and investment expert, with 35 years’ experience)

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