The 21-day lock down to contain the COVID19 pandemic has pushed most of the business units to a standstill. While many industries remain shut down, any relief in terms of loan repayment could ease out the burden of millions of borrowers in India. The much desired relief finally arrived after RBI Chief Mr. Shaktikanta Das announced in a press conference that all banks and NBFCs can allow 3 months of moratorium period  on repayment of term loans outstanding as on March 1 2020. However, there are several concerns surrounding the moratorium period as not every bank follows the same policy. Here are the answers to some of the questions that you may have in your mind. 

Who can get this 3 months moratorium on term loans?

All commercial banks, co-operative banks, all-India financial institutions, NBFCs have been permitted to provide 3 months of moratorium. The RBI policy statement says that the moratorium is applicable to all the term loans outstanding as on March 1, 2020. Any loan that has a fixed tenure is called a term loan which may include home loan, education loans, personal loan, agriculture loan, crop loan, auto loan and consumer durable loans that have predetermined repayment period. RBI has clarified that payments on loans availed  against credit card limit and credit card dues can also be deferred by 3 months. It should also be noted that loans obtained after March 1, 2020 are not covered for availing the moratorium period. 

For how long the moratorium period is offered on term loans?

RBI has permitted banks and NBFCs to allow 3 months of EMI holiday, starting from March 1, 2020 till May 31, 2020. Most of the borrowers might have already paid their EMIs and credit card dues for the month March 2020. Ideally, it is now applicable only to April and May EMIs. You should remember that EMI holiday accrues simple interest on outstanding amounts which needs to be paid additionally. 

What does the moratorium period mean to me as a borrower?

The moratorium or holiday period means that the repayment of the loan starts after a gap of a few months. You do not have to pay the EMI for that period. Home loans and education loans generally come with a moratorium period of up to 1 year. In normal circumstances, as per the policy, simple interest is applicable for the entire moratorium period which will be added to the repayment. As per this policy, the borrower will not need to pay EMIs - both interest and principal - for the next three months. RBI has clarified that the moratorium period of 3 months will accrue interest which will be added to the outstanding amount. 

Should I make use of the moratorium?

Moratorium does not mean waiver of repayment, but it is deferment of payment. The terms and conditions of the loan remain the same except that the repayment period is extended by 3 months. Delaying payments can impact your future financial goals that you may have planned after 3 months. You should note that EMI holiday does not come for free of cost. It will accrue interest for three months which will be a heavy burden on your repayment. Moreover, it can lead to missed payment in case you are unable to repay an EMI due to the additional amount. Hence we strongly recommend that you pay it on time to stay on track with your good credit health. 

Will my credit score get affected due to moratorium?

The RBI has clearly stated that non payment during these 3 months will not qualify as default and it will not have any adverse impact on the credit history of the beneficiaries. However, it should be clarified whether borrowers should opt for the moratorium or it will be applicable to all. In case you have not opted for moratorium and refrained from repaying, it can impact your credit history. You should check with your bank/lender and confirm the same. 

We recommend that you regularly check your credit score during this period to make sure it is not impacted and the reporting is correct. 

Other Importance Measures in RBI Monetary Policy

We live in tough times with the unprecedented slow down in the economy worldwide. Reserve Bank of India has been in action on a daily basis to alleviate financial stress and keep the financial system sound and functioning. In its latest monetary policy, RBI has come up with the following measures to bring some relief to the borrowers and banks. 

  • Repo rate has been reduced by 75 bps to 4.4% which means banks can get loans from the central bank at a lower interest rate. Banks will pass on the benefits to the borrowers with lower interest rates on various types of loans. 
  • Reverse repo rate has been reduced to 90 bps to 4%. Reverse repo rate is the interest rate at which the RBI borrows money from commercial banks. 
  • Cash Reserve Ratio has been reduced to 100 bps to 3%  which will allow the banks to release the primary liquidity of Rs. 1, 37,000 crores uniformly across the banking system. 
  • Lending institutions have been permitted to allow deferment of interest rates for next 3 months on working capital sanctioned in form of cash credit and overdraft. 

End Note

Most of the industries in the country will go through a difficult phase due to COVID19 pandemic. The Indian Government and RBI have taken several measures to ease the situation and bring back normalcy in the economic growth. RBI has asked the banks and other financial institutions to do all they can to keep credit flowing to economic agents who are facing financial distress due to the pandemic and isolation.