Should you opt for three-month moratorium for debit card EMIs?

Over the past one week, banks have come out with details on how customers can opt for the three-month moratorium on term loan equated monthly instalments (EMIs) and credit card dues. According to the Reserve Bank of India (RBI), the deferred loan instalments under the moratorium will include the following payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) equated monthly instalments (EMIs); (iv) credit card dues.

You can avail the three-month grace period for payment of EMIs on loans like home, car and personal loans. You can even opt for the moratorium on debit card EMIs. So, if you have converted your debit card payments to EMIs to buy a phone, a consumer durable or converted your e-commerce purchases to EMIs, you can avail of the three-month moratorium.
Here is a look at how this will work.

Moratorium on debit card EMIs
Debit card EMIs are typically available for tenures of three, six, nine, and 12 months; some come with slightly longer tenures as well. They usually do not require much documentation and payments are linked to your savings account.

Banks that ET Online spoke to said that debit card EMIs fall under the ambit of term loans. "Term loans broadly cover all EMI based loans, including EMIs on debit cards," said a spokesperson for/representative of Kotak Mahindra Bank.

Although not all banks have specifically mentioned that debit card EMIs can be deferred for three months, some like ICICI Bank and Axis Bank have mentioned it in their moratorium FAQs on their websites.

Axis Bank's FAQ section states, "For EMI on Debit Card, if you opt for the facility, no EMI recovery will be done from your savings account during the moratorium period."

How the moratorium will work
If you have opted for the EMI moratorium, "The moratorium of three months will be applicable for the EMI on debit cards. The demand for the EMI will not be generated by the system from March to May 2020 and the tenure would be extended for a period of three months accordingly. The interest during the moratorium period will keep on accruing on the outstanding amount," Akhil Handa, Head Fintech, Partnership and Mobile Banking, Bank of Baroda.

During the moratorium period, as per the statement cycle dates, interest charges as specified at the time of availing of debit card EMI will be levied if your dues are not cleared within the payment due date.

"Auto debit will not be triggered during the moratorium period if you have opted in for moratorium. Auto debit facility would start again from Jun 2020 statement cycle at pre-moratorium configuration," states ICICI Bank on its website.

Regarding purchases made via your debit card during the moratorium period, this is how it will work: "Any unpaid dues in moratorium period will attract interest charges on the contracted rate if it is not paid within its interest-free (Grace) period i.e. by the respective payment due date," according to ICICI Bank.

How EMIs will be recovered once moratorium is over
This how EMIs will be recovered after the three-month moratorium, according to ICICI Bank website: "As EMIs are billed in your regular EMI on debit card statement cycle, EMIs would continue to be billed as per the original amortization schedule in your statement. For example, if your EMI was to be billed on Apr 16, May 16 and Jun 16. If you availed of the moratorium benefit on Apr 05, the EMIs would still be billed on Apr 16, May 16 and Jun 16. The payment for these billed transactions will need to be done as per the payment due date of the Jun 2020 statement to avoid any penal late payment or interest charges. In case on non-payment of statement dues (which includes EMIs billed) by the respective payment due dates, interest charges will be accrued at the contracted interest rate and will be levied at every statement generation in moratorium period which will need to be paid after the end of moratorium."

If you want to defer your debit card EMIs, then check with your bank about the nitty-gritty. The fine print might be different for different banks.

Moratorium math
All banks, on their websites, have laid stress on the fact that this is a three-month grace period and not a waiver; you will have to pay back after the moratorium period. As mentioned above, the interest on the EMIs will keep accruing during the moratorium period. Opting for the moratorium will mean that your loan tenure can get extended by a few months or your EMI amount would have to increase (after moratorium is over) to pay the additional interest. Also, keep in mind that interest rates on debit card EMIs are on the higher side - about 14-16 per cent.

For instance, by taking a loan of Rs 50,000 on your debit card for six months at an interest rate of 16 per cent per annum on your debit card, the calculated EMI will be:

Before moratorium

After moratorium
Source: Bank of Baroda

As can be seen from the tables above, if you opt for the moratorium, your EMI amount will increase by Rs 349 per month. Hence, the customer should know that the accrual of the moratorium period interest on the outstanding amount has to be borne by the them.

Should you opt for it?
Opting for the moratorium would mean that you will have to bear the interest cost, i.e., pay a higher EMI amount. "Debit card EMIs, too, come under the ambit of the RBI-approved moratorium. One bank has, for example, shared that EMIs can be paused during the break but all dues will have to be repaid at once in June, else penalties and additional interest will apply. During the break, your unpaid dues will attract interest at the rate mentioned in your loan agreement, and this will be repaid at the end of the moratorium," explains Adhil Shetty, CEO, BankBazaar.

This is why banks and financial planners are advising borrowers to opt for the moratorium only if they have cash flow problems. "The call has to be taken by the borrower. If you have enough cash flow it is advised not to avail of this moratorium. Opt for it only if you are facing a cash flow problem," says C. S. Setty, MD - Retail & Digital Banking, State Bank of India.