EMI conundrum for those who have been laid off

The second wave of coronavirus has wreaked havoc in the country. The big gap in medical infrastructure has ravaged the country leaving many gasping for air. However, the financial impact of the second wave has already started showing its impact. According to data collated by the Centre for Monitoring Indian Economy (CMIE), the second wave has adversely affected over 73.5 lakh jobs, taking the unemployment rate to 8%. The data showed that the number of salaried and non-salaried employees declined from 398.14 million in March to 390.79 million in April.

During the first wave of coronavirus, following the lockdown, many people lost their jobs and several businesses were forced to down shutters. With no monthly flow of income, paying loan instalments became a major source of worry for those who were laid off. With the spread of the disease being higher this year, there is a fear that if the situation does not come under control, it may impact other sectors, which will result in another round of salary cuts and job losses. But the impact may not be so vast like last year as we have a rule book to go by this time. Moreover, it is to be seen in the RBI’s monetary policy scheduled next month whether measures like moratorium may be deemed necessary like last year, given the partial lockdowns declared by states.

Central bank steps in

Meanwhile, offering some assistance to small and medium enterprises, RBI governor, Shakikanta Das in an unscheduled press conference on Wednesday said: “The moratorium will be available to individuals and small and medium enterprises that have not restructured their loans in 2020 and were classified as standard accounts till March 2021.” RBI announced a moratorium period of three months in March 2020 for people facing financial problems. The moratorium period was later extended by another three months till August 2020.

How can one pay EMIs?

“In an ideal situation, “emergency funds,” are meant for such circumstances. Typically financial planners suggest maintaining an emergency fund equals at least six to twelve months of expenses, including EMI. However, if you do not have any emergency funds look at the investments that you can liquidate with minimum penalties and tax implications. For instance; if you have investments in liquid mutual fund schemes, you can consider withdrawing funds from them. Typically there are no exit loads even if you withdraw funds from liquid MF schemes within weeks of investments,” said Rishad Manekia, founder and MD, Kairos Capital.

Renu Maheshwari, CEO, Finzscholarz Wealth Managers, told Money9: “If you miss the EMI then your credit history gets affected which can, in turn, impact your credit score. Professional advisors always say that one should never have a credit card loan. If you have one then you need to look at other aspects in terms of cash reserves and investments. Fortunately, markets are up right now, so if you have invested in equities then you can encash your investment to pay credit card EMIs.”

What if you miss a EMI payment?

In case a borrower misses a single EMI payment, then a late fee is charged, which is around 1-2 % of the EMI amount. Apart from late fees, there may also be a penal interest on the amount overdue for the default period. Moreover, any default will have a negative impact on your credit score significantly, which may lead to a higher interest rate on future loans since the credit risk is higher.

It is always advisable to pay your instalments on time. Dip into your liquid funds to pay the next EMI rather than defaulting on the payment.