Are Covid-19 Loans For You?

Some of the banks that offer Covid-19 personal loans are the Bank of Baroda (BoB), Punjab National Bank (PNB), Union Bank of India (UBI), Bank of Maharashtra (BoM), and Bank of India (BoI).

“Many of our customers have temporary cash flow problems because their employers pay them lower salaries during the lockdown. For such individuals, we’ve introduced Covid personal loans with lower interest rates and relaxed valuation standards, “said Muchal Venkatesh, General Manager, Retail Banking, UBI.

Since these personal loans are earmarked, the interest rate is only 7.2% pa (for the UBI product). Typically, PSBs charge 14-18% per annum for personal loans. But should you choose them?

The conditions

The eligibility criteria for these loans are different from those for normal personal loans.

BoI, for example, gives loans to customers who have been receiving salaries through the bank for at least one year or who have an existing home or personal loan. PNB, which has named its product Sahyog covid-19, also offers it to existing customers who receive their salaries through the bank.

UBI offers it to customers who have a salary account or who have taken out a housing, mortgage, vehicle, private or pension loan from the bank. It grants a loan amount equal to six times the last salary or pension of the applicant. “Ours is a floating rate personal loan. We also grant a moratorium for the first few months (until the end of June). The interest accrued during the moratorium would be added to the capital. The customer has to make the payment in 57 EMIs, “Venkatesh said. Since this is a floating rate loan, the rate will change when the Reserve Bank of India (RBI) changes the repo rate.

BoB gives Covid-19 loans to those who have taken out home, mortgage or car loans from them. The loan amount depends on the EMI of the existing loan. The maximum amount that can be drawn is 10% of the sanctioned limit of an existing home or mortgage loan and 20% of an existing car loan. So when a person pays an EMI from 30,000 for an ongoing home loan, the bank will sanction the loan so that the EMI of the Covid-19 loan is 3,000 (10%) or less. “It doesn’t matter whether the borrowers are employees or self-employed. They should be our loan customer for six months or more and have paid their EMIs on time in the past three months, “said Virendra Kumar Sethi, director of mortgages and other retail investments at BoB.

The maximum credit limit for most banks is in the range of 3 lakh-5 lakh and there is no processing fee. The minimum ticket size varies depending on the bank. BoB, for example, sanctions a minimum amount of 25,000.

These loans are also available to those who have applied for a moratorium on their ongoing loans.

Lots of customers

The initial response to BoB’s product has been encouraging. Within six to seven days of launching about a month ago, the bank had sanctioned at least 3,500 loans. UBI had paid out all around 26 crore in the first few days after starting in early April.

The average ticket size of the loan also varies depending on the bank. BoB expects it 1.5 lakh, while the UBI requests for an average ticket size of. Has 3 lakh.

“In Tier II and Tier III cities, many employers were unable to distribute salaries to workers because of the lockdown,” said Rishi Mehra, CEO of Wishfin.com, a credit and credit card marketplace.

Mehra also pointed out that PSBs are overflowing with cash. “They park money with RBI at a much lower rate. Even if they are able to lend at their benchmark rate, they would still be happy as there is no credit in any other product category, “he added.

Should you take it

These loans are useful for those who want to consolidate their debts. Let’s say you have a pending credit card. You can take advantage of these loans, which are available at a much lower interest rate, and repay the credit card issuer. “Covid-19 personal loans can lower the debt burden if used intelligently. A borrower can use it to replace expensive loans, “said Vishal Dhawan, founder of Plan Ahead Wealth Advisors, a financial planning company.

However, you should avoid taking out these loans to meet your cash flow needs. “To avail this loan to resolve cash flow problems, a person needs to be sure that the problem they are facing is temporary. But we have a lockdown and no one knows how and when it will be lifted. Most people will not be sure if the cash flow problem is temporary or if it can spread, “Malhar Majumder, a Calcutta-based financial planner and partner of Positive Vibes Consulting and Advisory, an investment advisor to the Sebi Registry.

If the situation does not improve, companies can lower salaries further or opt for downsizing. When the future is uncertain, there is no point in taking on more liabilities. Don’t let the product influence you just because the cost is lower. It is best to avoid new levers in the current environment.

Typically, planners advise against liquidating investments if they generate higher returns than the cost of borrowing. However, this does not apply if there is no predictability about future income. So if you don’t have an emergency fund, the best option is to liquidate your investments. Consider the penalty and tax before deciding which one to liquidate first.

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