With the economy in bad shape after the battering it has received from COVID19 & subsequent lockdowns, many people have either lost their jobs or have to make do with salary cuts or deferred payments. Even small & medium sized business have been hit and many may not survive the next few months. It is indeed a hard time where we have to be very careful with our financial decisions. Now since the government is slowly opening up the lockdown in different phases, it is imperative for us to manage with what is available and put in our best efforts.
Fact remains that day to day life activities cannot stop whether there is COVID or not. Considering the hardships the common man has been going through the finance minister Mrs. Nirmala Sitharaman had proposed a COVID19 loan scheme with a low interest rate to inject some much needed liquidity in the economy.
Banks & NBFCs have been responsive and trying out these new ideas for their existing customers. This is a good initiative but ultimately banks have to look at profitability to ensure their survival. So they will consider a prospect’s credit history before sanctioning a COVID19 loan.
There are 2 categories of people in today’s scenario. One category of people whose salary has been cut / deferred/ loss of revenue in business/ profession & second category whose financial lives are more or less on track.
And it is the first category who needs desperate help. However this category of people should think properly before going ahead with a COVID19 loan. Basic question is will they be able to pay off the EMIS regularly??
First of all banks always check the track record of a prospect and if the track record is not satisfactory they will refuse a loan. Some banks might be offering a moratorium for a few months in the hope that things should normalise in a few months. But this moratorium does not mean that the interest or the EMI is waived off. Interests accrue and will be added to the overall repayment costs. Once the repayment process or EMI starts you will have to mange the finances and pay. If you feel that your financial situation will improve and liquidity issues can be managed going forward then do take the loan. If you feel that you will be under financial & liquidity stress for a long time, then don’t burden yourself with additional EMIs.
Some details about COVID19 loan
1. This loan is given by banks to existing customers to tide over the current liquidity crunch due to layoffs, salary cut, revenue shortfall etc.
2. Since loan is being offered either to existing customers who have an account or existing home loan customers, credit score will be a key metric.
3. Loan duration may range from 6 months – 5 years. Interest rates may vary between 8%- 11%.
4. Some banks may charge zero or very low processing fees. Also check about pre-payment structure with your bank.
5. Loan amount may vary from 2 lakhs – 5 lakhs. In some banks, loan amount may be fixed depending on the last filed income of the borrower. Calculations will vary for self employed person & salaried person. Check these details with your bank.
6. At present COVID19 loans are being given by SBI, BOI, Indian Bank, UCO Bank,Bank of Baroda, PNB, IOB & Union Bank of India.
So be very careful, take your time and think deeply before going ahead with a COVID19 loan.
However, the best option would be using your Emergency fund or savings which you may have accumulated in the last few years. Do discuss the tax and penalty probabilities with your CA before using up your investments or emergency fund.