A credit score is a dynamic one, given on the basis of a borrower’s behaviour that summarises the historical information. The Reserve Bank of India’s (RBI’s) decision in March 2020 to allow a moratorium period of three months for all outstanding loans (which was subsequently extended to six months), aimed to provide relief and reassurance to those who were financially impacted due to the pandemic. This moratorium on term-loans and credit card repayments was to help customers balance their lives and livelihoods in the near term by deferring their debt repayments.
It is important to maintain financial discipline and ensure that the amount saved by deferring equated monthly instalments is not used for discretionary spending. The moratorium could impact borrowers differently, depending on which stage of the loan cycle they are in. For example, for consumers in the early stages of a loan, the impact would be even higher, as the interest of the moratorium period gets added to the principal, thereby leading to increased debt.
Borrowers must recommence regular repayments and ensure that they do not default on their loan obligations. With the extended moratorium having concluded on August 31, routine repayments have become binding with effect from September1, and borrowers defaulting on these payments will not only hurt their credit scores, but also run the risk of being classified as non-performing assets (NPAS).
Some credit bureaus have been calibrating their scores to ensure that any non-payment due to the moratorium is correctly captured and does not adversely reflect on the consumer’s credit score, which continues to differentiate customers’ risk, based on historic factors, new loans and balance build-up patterns. Opting for the moratorium would not be treated as a “default” of repayment of dues and will not impact a consumer’s credit history as long as the data is reported by their respective lenders.
However, given that the loans continue to attract interest even during the moratorium period, the total debt of the consumer will increase if they have opted for the moratorium, and this may impact the ability of the consumer to avail themselves of new or additional loans. Additionally, lenders are allowed to restructure loans to provide further relief to borrowers. However, borrowers must prioritise repaying their loans over nonessential expenses and avoid restructuring the loans to the extent possible, because loan restructuring will lead to additional financial costs over time. In the odd case that they have missed their installments even for the months of September and October, they would be well-advised to make some payment and regularise their account by November-end, before itis classified as an NPA thereby resulting in adverse consequences.
It is a good practice to review your credit report regularly to make sure it is up to date and accurately reflects the circumstances, because any discrepancy by your lending institution can hurt your credit scores. It is important to know that regularly checking your own credit report on the credit bureau website will not lower the score. To conclude, I would like to reiterate that keeping up with payments on time, prioritising re-payment over non-essential payment and regularly checking one’s credit report are some of the ways in which borrowers can maintain a healthy credit score even in these challenging times.
By Sathya Kalyanasundaram, Country Head and Managing Director, Experian India