Reserve Bank of India’s Governor Shaktikanta Das invoked Mahatma Gandhi twice in his speech as he unveiled a fresh round of measures to overcome the increasing Covid-19-induced financial challenges before the country.
The central bank extended a helping hand to the common man in the shape of a loan moratorium extension and cheaper home loan rates. Acknowledging the subdued economic activity in the country due to the Covid-19 lockdown, the monetary policy committee (MPC) of the RBI, which met out of the turn, voted in favour of a rate cut to widen the relief measures for the common man and the economy.
Take a look at the key takeaways from the RBI MPC that will have an impact on your money.
Repo Rate Slashed, Makes Loan Cheaper
In the light of unprecedented financial challenges due to the Covid-19 pandemic, the MPC voted in favour of 40 basis points reduction in repo rate. The latest rate cut brought the repo rate from the 4.40% earlier to 4%. The repo rate is the rate at which the central bank lends to the commercial banks. The repo rate cut is a welcome move at a time when people are struggling with financial challenges due to job or income loss and pay cuts. The cut in the key policy rate is expected to make loans cheaper for new borrowers as well as translate into lower EMIs for existing borrowers. So for instance, you have a repo rate-linked loan of Rs.40 lakh for 20 years at 8% interest, customers can expect to save approx. Rs.2.38 lakh as interest payable during the tenure of the loan. A borrower of MCLR-based loan will have to wait for the reset period of their loan to get their EMIs lowered. You can connect with your lender to have more clarity on this.
Loan Moratorium Extension
To ease the financial stress on borrowers, the RBI in March had asked all the lending institutions to allow a moratorium of three months for all term loans, including home, car and personal loans. Both private and public sector banks offered the loan moratorium option to its customers after RBI’s request in the wake of Covid-19 crisis till May 31. The RBI has now asked banks to extend the moratorium or EMI holiday on all term loans till August 31, 2020. It is important to note that the moratorium offer should not be taken as EMI waiver as the interest would continue to accumulate on the outstanding principal amount. So if you are in a financially tough situation where you cannot pay your EMI, opt for the moratorium for the number of months you need to. But have a repayment plan to recover from the increasing dues. You should also be aware that opting for the moratorium may extend your loan tenure by a great deal, adding considerably to your loan burden.
Credit Card Dues Moratorium
The RBI has announced an extension of moratorium benefit for all retail loans. The moratorium was on also announced on credit card dues in March. So the moratorium for credit cards dues is likely to be included in the second moratorium as well. However, do remember, the interest rate on credit card dues are high and they would keep on accumulating even during the moratorium. So try to keep paying your credit card in full to avoid accumulating interest.
Impact On Credit Sure
The RBI in its March announcement had said that the loan EMI holiday will have no impact on the credit history of a person. The extension of loan moratorium for further three months may not affect your credit history. However, to have a healthy credit score, try to be timely and regular with your repayments. Despite the moratorium, it makes sense to repay your dues and keep checking your credit score to flag any major issues.
A repo rate cut lowers the interest returns from savings, fixed and recurring deposits, as well as small savings schemes. The rate for small saving schemes was recently cut by the government. A fall in the stock markets has made people wary of investing their hard-earned money in equities and so they are now looking for assured returns through safer instruments like fixed deposits. As FDs are fixed-rate instruments, an existing investor need not worry, but new investors will get lower returns due to the falling rates. You must invest as per your financial goal and try to diversify your investments to mitigate risks and maximise returns.
The government and central bank are doing their bit to help people tide over this financial crisis. You should also take some steps like cutting down on your discretionary expenses and boosting your emergency fund to assure financially smooth times ahead for yourself. To stay safe and healthy, try to go digital wherever possible to avoid the risk of the disease.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.