Moratorium on credit card dues

In line with the market expectations, the Reserve Bank of India (RBI) Governor Shaktikanta Das in his press conference on May 22 (Saturday) among other things announced extension in the moratorium period on all term loans by three months till August 31, 2020. Earlier, the RBI had announced a three-month moratorium on all such loans as on March 1, 2020 and the equated monthly installments (EMIs) falling due between 1st March 2020 and May 31st, 2020 were not deducted. Now the relief stands extended till August 31, 2020. 

Let me reiterate that the said EMI repayment holiday does not mean that the EMIs are waived off. The borrowers of all term loans such as home loan, car loan or the credit card user have to pay the accrued interest at the end of the moratorium period. In other words, the moratorium is deferring the repayment of installments but banks won’t be stopping applying interest during this holiday period. The interest burden actually accumulates over the period.

Meanwhile, a lot of queries are pouring in seeking clarity about the repayment holiday on credit card dues. Even as there are many who have already availed the moratorium period in the first phase, they are still not clear about the dues which they have to pay once the moratorium period is over. So, let’s understand all about moratorium on credit card dues.

What is the exact form of moratorium on credit card repayment? 

Opting for moratorium on your credit card bill means that you will not be required to pay anything for the six-month period (from March to August), not even the minimum due amount. Even the bank won’t charge any late payment fees. During the period you can continue to make fresh purchases. However, interest will be charged as usual on the outstanding amount.

What’s the monetary benefit to the credit card user?

The only relief you will be getting through this regulatory package of the central bank is that you don’t have to pay outstanding dues of your credit card during the period of the moratorium. You are simply deferring your liability which will only swell by availing the repayment holiday. As already stated, the interest on outstanding amount will continue to be charged and any fresh purchases will also attract interest immediately. Precisely, at the end of it, you will end up with a hefty payment in the way of interest on the outstanding bill of your credit card. The only apparent benefit of opting for moratorium is that it doesn’t affect one’s credit scores.

So, availing moratorium on credit card is a bad idea?

Yes, it’s. You have to understand moratorium doesn’t mean waiver of your credit card dues. It only means no repayments during the moratorium period, but interest on your credit card dues will keep accruing each month. Notably, interest rate on credit cards could be as high as 42 per cent and there is every possibility in the given circumstances that deferring the repayments could swell your liability beyond your means.

Remember, at the end of the repayment holiday, you may have to shell out the entire outstanding amount, otherwise penalty/late payment charges will have to be paid by you. If you pay the minimum due, you may avoid the late payment charges but interest rate will be levied on the outstanding amount.

So, better would be not to avail the moratorium period and continue paying as much as is possible within the due date to avoid interest charges at compounding rate.

Why banks are blocking credit cards of those who have availed moratorium on outstanding repayment?

This is a temporary phenomenon. This could be a part of banks’ strategy to contain the risk of increased NPAs after the moratorium period. Banks understand this that opting for moratorium means the customer has cash flow problems.

According to industry estimates, about 65-75% of cardholders pay their dues on time, but around 25-35% of them revolve their credit card outstanding or pay only a small percentage. Such customers are most likely to see a higher impact on their credit lines. In times of stress, if such consumers who pay only a small percentage of their outstanding amount, spend more on their cards, it’s likely that they won’t be able to pay even the minimum amount due as interest would keep mounting. They are more likely to turn into an NPA. In this kind of situation banks may reduce the limit or block the card.

Banks can also reduce card limit to save the cardholder from the risk of fraud. Many customers enjoy a high credit limit but use only a small portion of it. A cardholder, for example, may have Rs.3 lakh limit. But for the past one year or so, he has been using only Rs50000-100000 a month. Here the banks have started reducing the credit limit on their cards to prevent any fraudulent usage even if they were regularly repaying in full.

Notably, during this period of lockdown, banks track the spending of card holders. If they find a cardholder is most of the time spending on eating out and watching films, they can reduce the limits.

In succinct, it’s basically a risk management approach and might suit the interests of both the cardholders and the banks. As credit card debt comes with high-interest rates (over 40% a year), blocking the card might save those cardholders from credit card debt.

(Inputs from Reserve Bank of India regulatory package)