EMI Moratorium: Are credit scores dropping as lenders start reporting non-payment to bureaus?

The impact of Covid-19 led financial situation on the credit score of borrowers and how to improve it.

The big second wave has hit the Indian population and several cities and locations have gone for lockdowns and restricted movements. While matters of life and death continue to rattle almost all, the financial position of the individuals is also going to be impacted. Last year the government had announced a moratorium amidst the nationwide lockdown which to some extent had relieved the borrowers in maintaining their financial position.

Post moratorium, the borrowers are required to pay the unpaid EMIs and carry on paying the ongoing installments on their loans. Making payment of unpaid dues along with ongoing EMI’s may put pressure on the household budget of the borrowers.

“Retail borrowers can be broadly categorized into two groups – ones who opted for the moratorium and the others who did not. During the period of the moratorium and subsequent restructuring, the Credit scores of both groups were left intact as the RBI mandates ensured that missed payments were not being reported to bureaus as such. However, the crisis meant that there was a deterioration in the credit servicing ability of a large chunk of the moratorium borrowers, even if that was not appearing as a reduction in their credit scores,” says Anshuman Panwar, Co-Founder, Creditas Solutions.

The credit score of those borrowers who opted for moratorium was not supposed to be impacted as per the government’s directive. But, how is the situation now? “Post the ending of the moratorium, lenders have seen a sharp rise in delinquencies as they struggle to normalize the payment behaviour of customers who opted for the moratorium or restructuring. This has been accompanied by a drop in credit scores of these borrowers as lenders have now started to report their non-payment to bureaus,” says Panwar.

So, what should a borrower do now whose credit score may have deteriorated during these times? “Borrowers who have taken a hit on their credit scores should try to repay their EMIs or credit card dues by their due dates to the extent possible. Timely repayment of their dues will steadily improve their credit score over a period of time,” says Radhika Binani – Chief Product Officer, Paisabazaar.com.

According to Anshuman, here are three key things that borrowers need to do to improve their credit scores

1. As a first step, Borrowers should try and clear up the overdue payments and maintain timely payments

2. Credit utilisation should be around 30-40%. Customers should not max-out their credit card limits.

3. Secured Loans or quasi secured loans such as FD linked Credit Cards are a quick way to start building your score.

In case you have a high outstanding running on your credit card, here is what Radhika suggests. “Credit cardholders who cannot repay their bills by the due dates due to liquidity or cash flow constraints can convert their bill or a part of it into EMIs. The interest costs of such EMI conversions are much lower than the finance charges that usually range between 30-49% p.a., levied on unpaid components of the bill. The tenure of such EMI conversions can also go up to 48 months depending on the card holders. This allows the card holders to repay the unpaid dues in smaller tranches as per their repayment capacity.”