Covid-19 relief: You can defer 3 EMIs but that may be a very costly option

After RBI allowed commercial banks to provide their customers a moratorium of three months for repayment of term loans, public sector banks have sprung into action. Public sector banks have informed their customers about deferment of EMIs and interest dues to help soften the blow due the coronavirus crisis. The deferment may come at a price though.
The country's largest lender State Bank of India on Wednesday warned borrowers that deferment of equated monthly instalments (EMIs) offered under the RBI's relief package on account of COVID-19 could put an additional cost on them. The lender also advised borrowers to repay their loans if they are in a position to do the same.
SBI said on its website that deferring the EMIs for a home loan of Rs 30 lakhs with a remaining maturity of 15 years, the net additional interest would be approximately Rs 2.34 lakhs, which is equal to eight EMIs. In other words, if customers defers three EMIs then they will end up paying 8 EMIs more.
Last week, the Reserve Bank of India (RBI) gave a relief package for retail borrowers and businesses, by way of announcing a three-month moratorium on payment of all term loans due between March 1, 2020, and May 31, 2020.
The dispensation is aimed to mitigate the burden of debt servicing brought about by disruptions on account of COVID 19 pandemic and to ensure the continuity of viable businesses.
"In terms of RBI COVID-19 regulatory package, SBI has initiated steps to defer the instalments and interest/EMIs on term loans falling due between March 1, 2020 to May 31, 2020 and extended the repaymentperiod by 3 months. The interest on working capital facilities for the period March 1, 2020 to May 31, 2020 is also deferred to June 30, 2020," country''s largest lender SBI said.

State Bank of India
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@TheOfficialSBI
Good news for borrowers!
The bank has decided to extend the moratorium for payment of instalments/ EMIs in all term loans for a period of 3 months. This is applicable for EMIs/Installments due between 1st March 2020 to 31st May 2020. Know more: https://bank.sbi/stopemi
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Bank of Baroda said it is providing a moratorium of 3 months on payment of all installments falling due between March 1, 2020 to May 31, 2020 for all term loans including corporate, MSME, agriculture, retail, housing, auto, personal loans etc in pursuance of the RBI COVID 19 Regulatory Package.
Bank of Baroda
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@bankofbaroda
Dear Customers,
We understand your banking concerns given the current situation of #COVID19. Please visit http://bit.ly/Covid19_FAQs for FAQs regarding the moratorium. #StaySafeBankSafe @FinMinIndia @DFSFightsCorona @DFS_India @nsitharaman
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Punjab National Bank (PNB) tweeted: "Due to COVID-19 Pandemic, instalments/ interest due for March, April, May 2020 on term loan and working capital limit stands deferred. Term loan repayment period is being extended by three months accordingly. Contact your branch for further details."
Union Bank of India Managing Director Rajkiran Rai G told PTI that branches have been informed about with respect to moratorium on all term loans.
"In case of those who have opted for ECS route for EMI deduction, customers are given the option of availing the facility by informing the branch concerned through mail or other digital medium," he said.
Banks on its own unilaterally cannot stop ECS payment due to legal issue but the customer has the option of requesting bank to stop it, Rai said.
Among the private sector lenders, HDFC Bank and Axis Bank said they have been examining the RBI measure and will inform customers soon.
"We are actively working towards implementing the requirements of the RBI guidelines on COVID-19 Regulatory Package for offering moratorium on payment of instalments and/or deferment of interest. The customers would be informed shortly about the details and the manner of availing the option(s)," Axis Bank said in a tweet.
While HDFC Bank said it is studying the notification issued by the RBI and will communicate the details shortly.
HDFC Bank News
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@HDFCBankNews
Important #announcement.
Click here to visit our website for details on #EMI moratorium. https://bit.ly/2UQCPe7 @RBI @DFS_India @DFSFightsCorona @FinMinIndia @HDFC_Bank
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Rai of Union Banksaid the customers whose income has not been impacted are encouraged to continue payment as per the scheduled.
Another lender tweeted:"As per COVID 19 regulatory package of RBI, Indian Bank allows a moratorium by deferring payment of EMI/ Term Loan Instalments & Interest/ Interest on Working Capital for 3 months w.e.f 1st March 2020."
Canara Bank tweeted, "In terms of Covid 19 - RBI package, borrowers are eligible for moratorium/ deferment of installments/EMI for Term loans falling due from 01.03.2020 to 31.05.2020 & repayment period gets extended accordingly. SMS also has been sent to customers to avail the same."

Government needs to recapitalise banks

In my opinion, the Reserve Bank of India (RBI) has done more than anybody expected.
So far as EMIs are concerned, you are stopping the clock on March 31. This means no EMIs are to be paid till clock starts again, say on August 1. Now, think what happens to banks’ revenue situation. It will be okay in their balance sheets because EMIs will be shown as accounts receivables. However, banks are not getting interest on their assets, but they have to pay to their depositors.
This means, banks are going to run into a problem of negative income for these months and they will eat into their capitals. This will bring down their capital to risk (weighted) assets ratio (CRAR). If CRAR becomes tighter, it will restrict banks in terms of further loans that they can give. So new loans will not happen. The RBI said that CRAR norms will not apply in this period. However, capital base has to be replenished at the end. How that will be done is not being talked.
My sense is that sooner or later, the government will have to step in and not the RBI. The RBI can only provide liquidity to manage the situation, but it cannot recapitalise banks.
At the moment, demand is not the issue. In fact, last thing you want is to boost the demand. The issue at present is with the supply side. At least 55 per cent of the economy has now stopped production. In a situation of that kind, demand boost is a bad idea. The demand issue is going to crop up when you unfreeze the system and say lock down is gone and now please produce. A month ago, we were looking at a demand constraint, then suddenly overnight we have shifted our focus to a pure supply constraint.
Three-four months from now, the supply side issue will go away depending on how this process goes on, and demand constraint will come back and that too in a stronger way, it will be even worse. That is the point when massive fiscal expansion has to happen. Doing it just now will lead to increase in prices of essentials through roof. As it is, these are going to go up.
Now, timing has become critically important. You do things too early or too late, you are going to damage the situation.

How no-cost EMIs are dramatically changing e-commerce landscape

No-cost equated monthly instalments (EMIs) offered to consumers by credit card companies and NBFCs are dramatically changing the e-commerce landscape.
As much as 20 per cent of the gross merchandise value (GMV) of sales made on e-commerce platforms is being financed through the no-cost EMI route. Just two years ago, the share of such sales was 4 to 5 per cent, according to estimates by finance and e-commerce companies that Business Standard spoke to.
E-commerce major Amazon.com said that during its big sale that concluded this month, as much as three of the four EMIs taken by consumers were no-cost EMIs.
The company said that for products of over Rs 20,000, at least one in every three transactions was through a financing scheme.
Vikas Bansal, director, Amazon Pay, said, “No-cost EMIs will help expand the reach of financing to more customers, especially in smaller towns and cities. Today, of the more than 100 million active customers, only 30 million get financing options. We want to reach all of them and one way to do it is through the no-cost EMI route. This will surely help in growing the market.”
ALSO READ: Amazon launches EMI option without credit, debit card through 'Pay'
Under this EMI facility, consumers are given an upfront discount equivalent to the interest that they have to pay. The discount cost is borne by the manufacturer or seller or both. These EMIs are being offered by independent credit card companies as well as banks, NBFCs and even Amazon —through its wallet, Amazon Pay.
Earlier, credit card companies offered the same deal but would charge an interest, which consumers did not find attractive. The change was started last year by some credit card players but has now caught on as it has attracted customers.
Bajaj Finserv, one of the largest players in e -commerce finance, said it had a 30 per cent share of the market. Its average size of no-cost finance EMI is Rs 16,500. On average, it offers 160,000 to 170,000 loans a month. Consumers usually take EMIs for products that have a high value, like mobile phones, electronics items and high-end appliances. Most companies offer no-cost EMIs only if consumers buy products worth over Rs 3,000.
For instance, e-commerce companies say that during the big discount sales, fashion, as a category, provides the highest volumes but in terms of value mobile phones reign supreme.
Arvind Singhal, chairman of Technopak, a consultancy firm in the retail space, said, “This is going to be a growing trend and we see that categories like consumer electronics and durables followed by furniture are big-ticket items, which will be financed through these no-cost EMI schemes.” Singhal said manufacturers and sellers who are online are moving away to some extent from heavy discounts by offering consumers EMIs at no cost for high value items.

ALSO READ: Unsecured loans are costly; limit the EMIs to 10-15% of your salary
E-commerce players, however, said most sellers and manufacturers are cutting down on their promotion and marketing budgets (like advertisements) and are preferring to pass that on to consumers through no-cost finance.
They are not trimming their discounts as they want the market to grow. They point out that the no-cost EMI essentially means that many customers who were postponing their buying have now come into the market because of a financing option.
Logging gains
100 million online customers in India; only 30 million have access to finance
55-60 million transactions on e-commerce platforms in a month
20 per cent share of gross merchandising value (GMV) being financed through no-cost EMIs; the figure was 4-5 per cent two years ago
40 per cent GMV mobile phones account for
Amazon says one in every three transactions for products worth over Rs 20,000 is through a financing scheme