With India being in lockdown currently to contain the spread of COVID-19, the Reserve Bank of India has announced several measures, to tide over the economic fallouts. Among other measures, one measure that has brought a lot of cheer is the RBI allowing banks to grant a three months moratorium to their borrowers for term loans outstanding as on March 1, 2020. Read on to know more about the moratorium.
What is Moratorium?
A moratorium period is a technical term for a repayment holiday. It is the length of time during which a borrower gets time off from his or her loan repayments. Simply put, you as a borrower need not start paying your instalments or interest dues if you are granted a moratorium. As per RBI’s announcement, borrowers stand to get a repayment holiday from loan dues for three months from March 1 to May 31, 2020. The RBI has allowed banks and other lenders to decide how they will structure this deferment. This includes all kinds of loans including personal and credit card dues.
Why is Moratorium Crucial?
Moratorium period allows a borrower to postpone repayment of liabilities and helps in planning his/her finances better. As a normal practice, banks and other financial institutions offer moratoriums to students taking education loans. This is because there might be a time lag between students completing their studies and getting a job. Student loans usually have a built-in provision for a repayment holiday.
Some lenders offer moratoriums on home loans as well. For example, SBI’s Flexi home loan allows the customer to pay only interest in the initial 3-5 years, after which flexible EMI payments begin. However, in the current situation, banks are allowed to offer moratoriums on all kinds of loans for three months, without any such delay or default counting as default or bad loan. For instance, if you are running a business, in respect of working capital facilities, lending institutions are permitted to defer the recovery of interest applied (cash credit/overdraft) for this moratorium period.
Although such repayment holidays are offered to give relief to the borrower, they come with a downside as well. Let’s take the case of the current moratorium. While borrowers are not required to pay EMIs or interest until the end of the moratorium period, the interest will continue to accrue on their loan amounts. Effectively, people who avail of the moratorium will end up paying extra interest to the bank.
What are the Types of Loans which Come with Moratorium?
Here are some of the common type of loans which come with moratorium:
Education loan - Education loan refers to a loan that is taken by a person to handle his or her education expenses. It is primarily meant for financing higher education courses such as graduation, post-graduation, doctoral studies, research studies, etc. Since a student or a student's parent or guardian applies for this loan, the student wouldn't have income at that point to repay the loan. Therefore, once the student finishes the course and then starts earning money from his or her job, the loan can be repaid. This gap in the loan tenure during which the borrower does not have to pay anything is known as the moratorium period. It is a very important element of an education loan.
Home loan - Home loans are provided to purchase a house or a flat. They follow fixed or adjustable payment conditions and interest rates. In a home loan, the lender gives a certain moratorium period so that the borrower can take his or her time to manage all their other expenses and then start paying EMIs for the loan gradually. This EMI holiday is given to help out the borrower settle his or her finances.
How is Interest Calculated during a Moratorium Period?
During a moratorium period, the lender computes the loan’s interest by applying the concept of simple interest. The interest is computed on the amount that is offered and not on the entire loan quantum. The interest that is charged on the loan during the moratorium period will get ensued and then added along with the principal amount of the loan. Hence, after the moratorium is over, you will need to start paying your EMIs, which will include the interest accumulated over the moratorium period and the principal amount.
Additional Reading: Do’s & Don’ts to handle your money during the Corona Pandemic
How Does the Moratorium Period Impact Borrowers?
In case your income has taken a hit due to the virus outbreak and the impact of the lockdown, then the moratorium may be a boon. Your non-payment of interest or principal amounts during these three months will not be considered as a default and will not affect your CIBIL score. However, the interest accrued may hit hard once the moratorium ends. The interest can be particularly high for personal loans and credit cards.
Which credit providers can offer the RBI’s EMI moratorium?
The moratorium can be offered by any commercial bank, including regional banks, rural banks, and small finance banks. It can also be offered by cooperative banks and Non-Banking Financial Companies (NBFCs). Any all-India financial institution can also offer the moratorium.
Is moratorium a deferment or a waiver of EMIs?
A moratorium is not a waiver but a deferment of EMIs such that the repayment tenure and due dates are extended by 3 months from the expiry of the moratorium.
Do credit card payments also get covered under the moratorium?
Credit cards are categorised as revolving credit and hence are not included under term loans, so they are not included in the moratorium.
Does the moratorium include both the principal and interest amount?
Yes, the moratorium includes both the principal and interest amount that constitutes the Equated Monthly Instalment.
Will the EMIs being deferred hurt my credit score?
No, EMI moratorium does not affect your credit score in any way.
Can I pay my interest amount during the moratorium period?
If you are financially prepared to pay your loan EMIs during your moratorium period itself, you may be able to enjoy concessional interest rates. It makes good sense to clear your loan during the moratorium period especially because, during your moratorium period, the interest will be low. As the months' pass, your interest will increase and you will be forced to pay a very high amount after your ‘repayment holiday’.
As we can witness in the ongoing COVID-19 crisis, a moratorium is a response to a crisis that disrupts normal routines. In the immediate aftermath of such a crisis, an emergency moratorium on some financial activities may be granted by a government. It will be lifted when a normal business can commence.