The lockdown has had a catastrophic impact on the revenues of Indian corporates. To conserve cash, companies are resorting to layoffs by the hundreds. Almost every day there is news of some company or the other announcing downsizing. While some are doing so to remain afloat, others are cutting down on wage cost to try and bolster their sagging bottom lines. According to the Centre for Monitoring Indian Economy (CMIE), the coronavirus crisis has pushed up the unemployment rate in urban India from under 7 per cent in mid-March to more than 27 per cent for the week ended May 17.
Losing one’s job and the security of a regular income can turn one’s world upside down. People who don’t have enough savings to fall back on or have huge liabilities in the form of loan EMIs are the worst-hit. In April, the Reserve Bank of India (RBI) had directed all banks and other lenders to offer a three-month moratorium on loan repayments. Now it has extended the moratorium for another three months. This means that people who opt for the moratorium can get a reprieve of six months starting from March 1, 2020. While helpful, this is a temporary relief.
Those who have lost their jobs in the current crisis need to make a few fundamental changes to the way they manage their finances so that they are able to weather this storm. Here are a few tips they should follow:
No need to prepay low-cost debt: In the organised sector, retrenched staff get compensation and other benefits when they are handed the pink slip. In normal circumstances, any windfall that comes your way should be used to retire long-term debt, such as home and education loan. Prepaying a long-term loan makes sense because it allows you to save on interest cost. But these are not normal times. Therefore, you should not hurry to foreclose low-cost loans. While the interest charge on education loans is 12-14 per cent, that on home loans is only 7-8 per cent. Moreover, the interest repaid on a home loan is also eligible for deduction up to Rs 2 lakh under Section 24. This reduces the cost of this borrowed capital even further.
The tax benefit may not amount to much if a person has become unemployed and hence has little or no income. Even so, don’t prepay your home loan. Getting another job may not be easy in the current environment. Therefore, you need to hold on tightly to the cash you have and pay only when the EMI is due.
Foreclose expensive debt: While there is no need to repay low-cost debt immediately, the repayment of high-cost loans, on the other hand, should take priority. The moratorium offered by lenders on the direction of the RBI is certainly tempting. But keep in mind that it is only a grace period for payments, not a waiver. You will have to pay interest for the payment holiday. Credit cards charge 2-4 per cent of the billed amount for rolling over the balance for one month. Under the moratorium, if you don’t pay for two-three months, the cumulative interest could be prohibitive at 6-12 per cent. What’s more, additional spends will also attract interest from the very first day and you might end up with hefty interest costs.
If you are really finding it difficult to pay your credit card bill, contact the credit card issuer and get the outstanding amount converted into easy monthly instalments. The interest charged here is 18-24 per cent per annum. This is not cheap but it is still less than what a credit card rollover would normally cost.
Shun risky assets: The stock market crash has brought down valuations of share prices to mouth-watering levels. Some prominent stocks have fallen by as much as 50-60 per cent. However, this should not make you invest in these scrips. In your situation, the focus should be on minimising losses rather than maximising gains. Yes, this would mean letting go of a golden opportunity. But it is better to be on safe ground rather than take risks with the capital that you possess.
Don’t sully your credit report: Losing a job will naturally put pressure on your finances. In these circumstances, there will be a natural temptation to borrow. In recent years, a large number of fintech portals have mushroomed that are willing to offer quick loans on easy terms and conditions.
Exercise a little restraint when you are seeking a loan. Multiple loan enquiries can be counterproductive. Too many inquiries make you appear credit hungry. They will have a negative impact on your credit score, which is something you can ill afford at this stage.
Instead of a personal loan, consider taking a collateralised loan. Gold loan is a good option. Most families possess some jewellery. The interest rate is lower than on a personal loan. If you have a home loan running, it could also be a good idea to take a top-up loan to pay off other high-cost borrowings and consolidate debt under one lower-cost loan.
Focus on conserving cash: With the monthly paycheque vanishing, you need to curb your spending. One silver lining of the lockdown is that it has taught us how to enjoy a no-frills lifestyle. Since there is doubt about when you will find your next job, your focus should be on minimising outgo and conserving cash. A lot of bells and whistles can be removed without causing a significant dip in your lifestyle. You will have to recast your household budget. Knock off all unnecessary expenses, including subscriptions to TV channels you never watch, forgotten video games, restaurant memberships, and other discretionary items.
The writer is founder and managing director, MyMoneyMantra.com