The net is flooded with disparate views on Hon’ble Prime Minister Shri Narendra Modi’s bold step of demonetisation. On the fateful night of November 8th, 2016 in one masterstroke the PM made 86% of Indian currency in circulation, in denominations of Rs 500 and Rs. 1000, invalid. This left one and all gaping at the decision.
While some applauded the move, some looked for cover and others waited anxiously for the whole act to unfold. Up till now, the popular mood of the nation is positive. Most people have taken this action in their strides while others have claimed that India will be thrust into a poorer GDP, pegging annual growth rate several points down. Experts believe that this could only be a temporary downturn, if at all.
With this move the government aims to push India into becoming a less cash economy and is promoting the use of digital modes of payment such as credit cards, debit cards and e-wallets. What results it yields only time will tell. In the meantime, let us examine what impacts demonetization can have on your credit health.
Business Not as Usual
For sectors those are heavily cash dependants, such as farming, have faced a cash crunch post demonetisation. The sudden break in cash flow affected their routine work miserably and rendered quite a large number of people jobless. However, taking cognisance of the situation, RBI, at the directives of the government, quickly announced a “debt repayment holiday” for the period from November 8th to December 31st. RBI has clearly mentioned that for small ticket micro finance loans, farmer loans, loans given to people residing in the backward areas the banks will not report their delay or default in debt repayments to CIBIL.
This is so because due to shortage of cash their incomes and livelihoods have been deeply impacted. At such a time, paying off dues takes a backseat. The government has therefore allowed them a levy for almost three months to settle with the new pattern of currency issuance. This repayment holiday thus negates the effects that a non-repayment would have on credit score.
Cash or No Cash, Doesn’t Matter
For other retail loans in the urban sector, such as car loan, home loan, personal loan, credit card etc. the business runs as usual for most. Basically, for most of us the savings bank account or salary account is auto debited at a particular date towards repayment of outstanding loan. Since, for a greater proportion of the urban population, cash payments are not directly linked to debt repayments; there will be a zero impact of demonetisation on their credit score for their accounts will be debited as usual.
On the contrary, if you are someone who receives the salary in cash every month and would deposit it in loan account, you may be in a tight spot. Alternatively, it would be prudent to switch over to receiving salaries electronically through a wire transfer or through cheque payments. This way your account would carry sufficient balance before the due date. Till then, make sure your accounts carry sufficient balance or your payments could bounce and you would be reported to the bureau for default in payments.
One cannot deny that not all expenses are done using plastic money. A lot of expenses were being done by cash. The need of the hour is to shift gears according to the velocity of the growth of the economy and switch over to electronic modes of payment. People who have till now stayed away from plastic money must start using credit cards, debit cards, e-wallets etc for making payments as an alternative to cash. They have a positive impact on the control of finances and help the economy at large.
On the flip side, if you do not understand the nuances of a credit card or have never used one, you must understand its terms completely. If a person continues to use the credit card without keeping a track of how much one can afford to repay every month, then that someone could fall into a debt trap. Such a thing would be detrimental to one’s credit health.
With demonetisation, the general expectation is that interest rates would fall and there would be a boost in the demand for credit. While it may sound tempting to pick loans since interest rates have fallen, remember with every fresh loan application your score will take a hit. Too many can cause a landslide in your score.
For example, people are expecting property prices to dip greatly with demonetisation. With a lower price of a house coupled with a lower rate of interest, it could be super tempting to apply for a loan and buy it. But always remember, home loans are long term liabilities and the rates are normally flexible which could increase in the long run.
Before you take any loan, be prepared in every way to take on the responsibility. If you are not able to tender your debts then it could again lead to fall in your credit standing, which is laboriously built over time. Be very careful and plan ahead before you act on an impulse
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