Since the onset of the Covid-19 pandemic, individual borrowers have been facing numerous difficulties in loan repayments. Considering this, the RBI asked lenders to grant a moratorium in 2020. As borrowers continue to face a hard time in repaying any form of credit, the RBI has allowed a second restructuring this year too. Eligible borrowers who could not make use of the first loan restructuring will now be able to avail of the second one. This announcement was made on May 5, 2021, as part of various measures to tackle the impact of the second wave of Covid-19.
Since the time the first moratorium has ended, lenders have observed a sharp rise in non-payments. There is a constant struggle to ensure that the payment behavior of borrowers is normalized, especially those who had opted for the moratorium.
What are the impacts post-moratorium?
The stronger second wave has impacted the Indian population as several states have gone under lockdown and are imposing restricted movements. As the struggle between life and death continues to rattle all parts of the country, the financial situation of many individuals continues to remain impacted.
Despite the relief offered through the moratorium, many borrowers still struggle to meet the repayment obligations. Post the moratorium, borrowers were required to pay the remaining EMIs and the ongoing installments on borrowings. Paying unpaid dues and ongoing EMIs at once can have significant financial pressure on any borrower’s budget.
Hence, borrowers can use either of the following to ease the pressure:
- Use the second restructuring if the first was not used
- Talk to the lenders about granting some flexibility around repayments by explaining the personal financial situation
What is the effect of the moratorium on credit score?
During the moratorium period and subsequent restructuring, credit scores of borrowers were left untouched as per the RBI mandate. This was because the missed payments do not get reported to credit bureaus. However, the crisis resulted in a deteriorating credit servicing ability of majority moratorium borrowers.
Although the credit score of borrowers who opted for the moratorium was to remain unexpected as per the government’s directive, after the moratorium ended, lenders saw a rise in delinquencies. Repayment behavior of borrowers who used moratorium or restructuring started dwindling after the moratorium period ended. This resulted in a negative impact on the credit scores of such borrowers as lenders started reporting their non-payment to credit bureaus.
What happens to credit reports when there are late payments?
The late payments on your credit report can stay for seven years after the account was initially reported late. However, the impact on your credit decreases with time if you have been consistent in paying your outstanding dues on time.
How to improve credit scores post the moratorium?
If a borrower’s credit score has deteriorated during these tough times, they must try to repay their EMIs or credit card dues to the extent possible. Timely repayment of loans can help in improving credit score over some time.
Here are three main things that borrowers can do to improve their credit scores:
- Try to clear any overdue payments and make timely repayments without causing a financial stress
- Credit utilization must be kept minimal, around 30-40% is an ideal range. An important step in improving the credit score is to avoid using the entire available credit limit.
- Secured Loans can also help in improving the credit score within a short period.
Credit cardholders who have significant outstanding and are unable to repay their bills on the due dates can convert a portion of their bills into EMIs. The interest expense applicable on such EMI conversions is significantly lower as compared to the charges on late payments which are generally around 30-49% p.a. EMI conversions can also last for up to 48 months depending on the specific cases. This period allows cardholders to make repayments of unpaid dues in smaller portions as per their repayment capability.
Credit cardholders or borrowers must remember the due dates and try to repay on time to avoid late fees on non-payment.
How to avoid missing repayments on loans and credit card dues?
Following tips can help in making sure that borrowers don’t miss on timely payments:
- Auto-debit facility – The auto-debit facility is very useful for those who tend to forget making payments on the due date. Autopay allows authorization to credit card issuer or lenders to automatically deduct any outstanding amount or minimum amount from the borrower’s bank account on a specific date every month. This saves borrowers the hassle of remembering to make timely debt repayments.
- Reminders – Borrowers who want to effectively pay their outstanding dues on time can set up reminders. Calendars or online reminders are ideal for keeping a track of what has to be paid and when. Borrowers can also request creditors to provide online alerts before the due date of payments.
- Weekly payments – Instead of paying monthly, borrowers can try making weekly payments towards an outstanding. This can help in controlling the overall balances and make the payments faster.
All of the above tips can help in gaining a good credit score and prevent a borrower from paying high-interest rates or late fees on the outstanding.
Repayment defaults can lead to higher cost in the form of interest payments and penalties. This can also impact one’s credit history and reduce future creditworthiness. The moratorium is meant for such borrowers to ensure that their credit history remains untouched even if they skip repayments and opt for loan restructuring for the specified period.