We, at Credit Bazaar, have observed that the banking situation has changed drastically during this COVID-19 crisis. Even the loans specific to these crisis have come up to make the situations comfortable for people facing the money crunch. However, is it advisable to go for these COVID-19 loans because of your shortage of finances? Or are there other better options? Is this easy loan option going to be a pain in the back in the future? Will you regret going for this additional loan? Also, how are banks coping with the COVID-19 pandemic? What developments are the banks considering post this crisis? Well, relax, we have the answers to all your questions. Credit Bazaar observed the recent developments in banking and loans and took out the pros and cons of one opting for a personal loan during this pandemic, and what are the changes banks are making during this crisis. Let us study in detail below:
Should you go for personal loans during the COVID-19 crisis?
The delay or cancellation of salaries must be getting to you. A shortage of finances is commonly faced by people during this lockdown. Businesses worldwide are suffering and so are the people getting thrown out of their jobs. However, Credit Bazaar advises you to avoid taking personal loans unless you are in desperate need of cash. During the COVID-19 pandemic, various non-banking finance companies (NBFCs) and banks are rolling out personal loan schemes with more comfortable norms for their consumers. So, should you go for a personal loan for ironing out your short-term financial crisis? We, at Credit Bazaar consider the pros and cons of it as follows, considering the various aspects of it.
- Loan eligibility: The eligibility for personal loans depends on the monthly income, job profile, credit score, and employer’s profile of the borrower. Most of the NBFCs and banks do not require the borrowers to have an already existing relationship with them. But, if we observe COVID-19 loans, it is required for the clients to be existing borrowers or those who maintain pension accounts or salary accounts with the bank already. Also, the creditability of the borrower must be good and trustworthy for banks to trust them and approve their loans.
- Loan amount: Loan amounts for personal loans generally range from Rs 50,000 to Rs 20 lakh. Since the Covid-19 personal loans have been designed for meeting the temporary liquidity mismatch due to the crisis, the loan amount is on the lower end, from about Rs 25,000 and Rs 5 lakhs.
- Interest rate & processing fee: The rate of interest for regular personal loans ranges from 9% to 24% per annum, based on your credit profile and the lender. Processing fee can also go up to 3% of the amount of loan. As lenders are offering COVID-19 personal loans to their existing customers, they are charging lower rates of interests, starting at 7.2% p.a., and going up to 10.5% p.a. Several lenders are also not charging any processing fee for various Covid-19 loans.
- Loan tenure: Personal loan tenure ranges from one and five years, with few lenders offering a maximum tenure of seven years. For Covid-19 personal loans, few lenders are providing tenure of up to three years, with just a couple of them providing a maximum tenure of five years. Moreover, several banks are providing moratorium of up to 3 to 6 months in Covid-19 particular personal loans. Borrowers are requisite to just service the interest constituent during the moratorium period. The moratorium period is designed at offering relief to COVID-19 personal loan borrowers until the normalization of the liquidity position of the customer.
- Conditions Apply: Various banks have already laid out the ground rules on who is going to be eligible for such a type of loan. Different banks have varied rules for the same; some are offering it to only their existing housing loan consumers, while some have other criteria. The loan amount is capped differently for self-employed and salaried customers, depending upon the policies of each bank. They are also providing a moratorium period for helping to build the income flow before they again have to pay their EMIs. Moreover, since there is a lockdown nationwide, all the firms and banks are offering COVID-19 personal loan schemes for allowing you to put your application online.
What are the possible advantages of opting for this loan?
If we compare the regular personal loans, the interest rates are lower for COVID-19 loans. Such schemes are offered deliberately during this crisis for helping consumers whose cash flows might have got impacted heavily during this lockdown that the government has imposed.
What are the cons of such COVID-19 loans?
Such loans are only being offered to the existing consumers of the banks. Precisely, few banks are only offering it to their home loan clients. Few of them have extended it to other bank customers too. The universal rule remains that banks tend to give loans only to customers with a good credit score and having a responsible track record of repayments. Furthermore, there are several terms and conditions for the disbursal amount in the scheme and eligibility criteria.
Banks have associated the rate of interest of COVID-19 loan schemes to Reserve Bank of India (RBI)’s repo rates. Hence, when RBI increases the repo rate, the borrower’s monthly installment also rises. This is effective from the bank’s subsequent reset date during the loans’ tenure. Few of the kind banks are also offering moratorium of about three to six months in these schemes.
This means that during the moratorium period the borrower does not have to repay any installments. However, during this period, interest is being charged still and is added to the borrowers’ repayment costs. Also, there are penalty charges for delayed or non-payment on the outstanding amount of loan. This will again be an added cost if you are not able to repay by the date of due.
So, should you go for this loan?
Remember, a personal loan must be your last resort, always. Though it may seem very appealing to you during such a time, but once you resist, you will realize it was a good decision. This is because there are so many hidden costs and charges that if you skip any of them, you might have to pay way extra than you are abided to.
See, we know you might be stuck in a spot financially during this crisis, but try to tap on your emergency corpus first if you got one. If you don’t possess one, then liquidate your gold holdings or liquidate your existing investments.
An intelligent advice: from Credit Bazaar is to not opt for such loans just because they seem tempting to you currently, are easily available on online financial platforms, and carry a low rate of interests as compared to the usual personal loan schemes.
Well, you will thank us later for the above advice, because if you notice the long run, taking an extra loan for paying off an existing loan is just a decision leading to financial disaster. You might scratch your heads later on why you took it? It is especially important to control your expenses and be frugal during these times of job and salary cuts. See, we are not aware that till when this contagion might last and what shape it is going to take. Hence, only if it urgent, you should go for this loan, otherwise not. When viewed on a bigger picture, such loans are a long-term disaster, where over time you will regret this extra burden.
Additionally, if your business, profession, or job is intact, and you are only facing temporary income loss or pay cut, then you might consider a personal loan in the absence of any assets or any savings to fall back on. On a whole, a personal loan would be advisable if your regular income is not disrupted or are mostly to get back on track soon and you are just facing a temporary cash crush. Furthermore, check with your credit card provider or bank when going for a personal loan, that if they have a pre-approved loan offer. These come with a very low rate of interest.
How are banks helping during the COVID-19 crisis?
Financial institutions and businesses worldwide are facing the brunt because of this COVID-19 crisis. As this economic fallout is spreading, retail banking is facing the burden of it by juggling huge priorities that require strict actions for repositions now while also securing the future. Despite the social distancing advice, they are working to keep their distribution channels open. They are trying to manage customer expectations and revenue, despite growing pressure on consumers and near-zero interest rates. And, they have to keep an overall supervision on brand issues and strategy that will define their future working, as consumer behaviors and market forces will change after coming out of this crisis. There are various steps that the banks are taking currently such as the following:
- Focusing on business continuity planning on issues essential for survival: Banks are giving guidelines to their branches for setting up to be supportive of the ‘social distancing’ guidelines. Since, reduction of branch footprints may lead to excess capacity of real estate, hence, few of the branches are being closed temporarily. Banks are also considering adjusting branch hours and staffing times and mix. For instance, banks are establishing a fixed set of teams with alternative staffing days for avoiding cross-contamination. Moreover, they are adopting ‘golden hours’ at the start of the day for serving vulnerable populations. Additionally, banks are developing, communicating, and documenting a plan for processing physical mail, given that the facility footprints might change. They are also rebalancing workloads across operational branches because few areas are more infected as compared to others. Many employees are also shifted from non-critical work to more important and essential operations.
- Showing customer empathy while making accurate business decisions: During this almost once in a lifetime crisis, the important thing observed by the consumers is your response towards it. Several banks already have huge customer segmentation data that can play a vital role in meeting and determining consumer needs. For example, you can utilize this data for understanding which of the customers need more active management and outreach and which of them are in a better position for riding out this crisis with ease. Various banks are developing defined, specific, consumer service suggestions, such as waivers for homeowners who require liquidity, or converting credit card balances to home equity lines with proper fee deferrals. They are making sure that customer remediation and relief is provided, ensuring management of brand image, customer perception, the commitment of the local community, proactive outreach and growing wallet share.
- Re-plotting the post-COVID-19 strategy: It is too early to imagine a world post-COVID-19, however, banks are taking steps by keeping the long-term view in mind. After the emergency passes, banks are reviewing important factors that will be probably put into consideration. The significant factor here is new consumer norms are adopted with innovative business models, rethinking the aspects driving brand loyalty, restructuring the addressable market for growing beyond the core, reconstructing the resiliency plan, validation of long-standing business assumptions, continuing to build upon strong societal relevance, reprioritizing M&As and capital allocation plans.
Conclusion: When we view the bigger picture, the banking and loan systems have changed drastically during the COVID-19 pandemic and will continue to transform post the crisis as well. Due to the government-imposed lockdown, social distancing norms, economic crisis, and various such recent developments, banking scenarios have changed and new innovative decisions are being taken to overcome the problems. Even after the crisis ends, things might not be able to get back to normal with ease, hence, the new normal would have to be adopted with fresh decisions taken. As mentioned above, Credit Bazaar gave an overall view of the banking panorama and loan setting during the COVID-19 pandemic and post the crisis.
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