Borrowers who pay EMI to doubly benefit

Yangchen C Rinzin and Ugyen Penjore 

Those who have availed loan and could afford to pay their “equated monthly instalment” (EMI) could doubly benefit from the monetary measures as the central bank directed banks to ease the burden on the people.

The Royal Monetary Authority (RMA) as a relief measure during the Covid-19 pandemic has asked banks to waive off interest on loans for three months and defer monthly loan instalment repayment by three months.

The installments, all of it, if paid during the three months, – April, May and June, will be adjusted towards principal repayment. In other words, the whole amount would be deducted from the remaining principal amount.

Banks during normal times do not do this.

A portion of the monthly instalment, the size depending on the loan amount, is adjusted against the interest accumulated. The remaining is then deducted from the principal amount.

In these three months, there is double advantage as the monthly interest is waived and the principal amount could be significantly reduced. The bigger the loan amount, the bigger is the benefit.

Paying the EMI would help banks with liquidity flow.

The National Pension And Provident Fund (NPPF) is encouraging its customers with steady income and can afford to pay to continue paying the regular monthly instalment. NPPF lend housing loan, their biggest portfolio, besides education and home loans and student loan.

An official from NPPF said that those with bigger loan would see more benefits, as the interest component that will be waived for three months would also be huge.

The other beneficiaries are those whose loans are “new” or those who borrowed in the recent past. This is because the interest component is the highest when the loan is “new”. “The interest is on the principal and it is automatic that bigger loans would have bigger interest,” said the official.

Roughly calculated, a Nu 3.5 Million loan at 10 percent interest for 20 years would see 85 percent of the monthly instalment adjusted towards the interest component in the initial years of repayment. “This would decrease as the loan gets older and a bigger portion is adjusted toward the principal,” said a banker.

Clearing the misunderstanding on the deferment of EMI for three months, bankers said the EMI repayment would be extended by three months for those choosing not to pay in the three-month grace period. “We will not ask clients to pay the three month’s installment at once when the situation improves,” said a banker. “The loan period will be extended by three months.”

Rent waiver vs interest waiver

With the loan interest waived and the EMI payment deferred for three months, tenants are expecting landlords to waive partial or full rents for three months.

This would depend on how much the landlord would save from the interest waiver besides the “moral responsibility.”

If the savings from the interest waiver is substantial, it is logical to pass it down to the tenants. “But then, the building is not solely built on loans. What about the owner’s equity (own money),” said a banker. “It is best if left to the house owner.”

House owners are doing their own maths to see how tenants can benefit from the waiver. “I could afford to give 50 percent discount as the saving from the interest waiver is not substantial,” said a house owner.

Tenants, he said are also benefitted because the interest waiver is not only on housing loans. “My tenants are salaried people who, if availed loans, will benefit too. How will they help others?”

Another house owner said that she will wait until April end to decide. “I know who is affected and who is not. It is not complicated.”