After the Indian Government implemented lockdown measures to combat the Covid-19 pandemic, numerous businesses stopped, and many people lost their jobs. To deal with this, the Reserve Bank of India (RBI) offered a three-month moratorium on home loan repayment for May 31 2020. This was later extended by another three months to August 31 2020. This EMI-free period is called a loan moratorium or EMI moratorium.
Following the second wave of the pandemic, RBI did not extend the loan moratorium facility in May 2021. Instead, it offered a loan restructuring program to provide relief to borrowers who did not opt for this facility in the previous year.
In the following sections, we will explain RBI’s moratorium for loans, its provisions and loan products under the facility
A loan moratorium allows borrowers to postpone their EMI payments. During the moratorium, borrowers do not have to make any payments, however, interests on the loan are accrued (more on this later). A Government or the Central Bank often enacts moratoriums in response to temporary financial hardships.
Moratoriums function as temporary suspension of financial activity in response to a crisis that disrupts a normal routine. These are granted in the aftermath of earthquakes, droughts, floods or disease outbreaks and lifted when normalcy returns.
This facility is necessary for people suffering from financial hardships as it offers much-needed relief without impacting their credit scores. However, borrowers who could repay did not benefit due to additional interest charges that largely offset the short repayment relief.
The process of how a loan moratorium works are simple. During the moratorium period, the lender would give a grace period to the borrower. During this period the lender would not have to pay any EMI and only the interest will get accrued. Upon the situation coming back to normalcy, the regular repayment will be continued.
However, the interest on your loan isn’t waived but deferred. This means that you would still have to pay interest on your loan accrued during the loan moratorium or EMI holiday period.
Also, another point to note is that longer EMI-free periods could lead to longer loan tenures. For example, if you have taken a loan that was to be repaid in 8 years and your loan moratorium stands at 6 months, your loan tenure could extend up to 8 years 6 months unless you choose to foreclose the loan through lump sum part or full payments.
To avail of the loan moratorium period, the borrower will have to satisfy one or more of the following criteria
Borrowers will be eligible if they have availed of any of the following loans:
Also, there should not be any default in repayment till March 31 2021.
As a part of this relief package, all financial institutions in India had to provide this facility for borrowers with outstanding loan repayment. The facility was available for all loans, including personal loans, home loans, credit card dues, education loans, etc. Borrowers could voluntarily choose to opt for the scheme if they had outstanding loans as of March 1, 2020.
It was available for the following payments:
While lending institutions allowed borrowers to postpone payments, interest was still accrued on the outstanding loans. As interest gradually accumulated, it increased the total payable amount, resulting in some borrowers opting out of this provision.
Though the interest on loans was not waived off, the Supreme Court (SC) directed lenders not to charge compound interest, interest on interest or penal interest. In case the lenders collected compound interest from March to August 2020, they had to refund the amount or adjust it in the next instalments.
The following table provides key highlights of the EMI moratorium.
|March 1 2020 to August 31 2020
|EMIs, interest and principal component, credit card dues
|EMI-based loans and credit cards
|Voluntary for all borrowers
|Process to apply
|Both offline and online
|Ended on August 31 2020
Consider the following illustration to have a better understanding of loan moratorium:
Suppose, there is a personal loan availed by Mr Roy of Rs. 15,000,00. The loan repayment tenure is of 12 months with an interest rate of 10%.
The monthly instalment is Rs.1,32,398.
After repayment of 6 months, he availed of the benefit of a moratorium period for 3 months. During the moratorium period, the interest got accrued which will have 3 options of repayment post moratorium period. They are added to the Emi, increased tenure or a one-time payment of the interest accrued. The last option is the best one should opt for as for the other two options the interest will accrue upon the interest which will increase the principal amount.
The following table will help you understand breakdown of the amortisation schedule:
From the above table, repayment is made till the 6th month. After which the outstanding balance is Rs. 7,70,062.
The interest accrued for the following three months will be: 6898+ 5774+4640= Rs. 17,312
Post completion of the moratorium period among the three options as mentioned earlier, you can choose the one convenient for you. If you choose to add it to the outstanding amount, then the total repayment amount will be 770062+17312= Rs. 787,374.
The following are various loan products where the moratorium applies:
A moratorium is not a new concept for home loan products. Borrowers buying under-construction properties often ask for relief from repayment. However, the RBI moratorium allowed one to postpone all repayments from March to August 2020. As home loans are long-term commitments, one could opt for repayment relief if necessary.
RBI provided a loan restructuring facility for personal loans for borrowers making regular payments in 2020. Initially, people thought that the relief measures covered only unsecured personal loans, but RBI later clarified this. According to their definition, the word ‘personal loans’ in the circular referred to all sorts of secured and unsecured loans.
In August 2020, RBI provided banks with the option to restructure loans to help individuals manage financial stress. Under this, students in debt with education loans could get their repayments rescheduled or get a moratorium of up to 2 years.
The relief measure also included the option to defer repayment of credit card dues. However, with credit cards having high rates of interest, this measure led to significant interest accrued for six months. As such, it was only useful for those with extreme cash crushes.
One could apply for the loan moratorium through offline and online modes:
The benefit of paying a loan within the loan moratorium period is that the interest doesn’t get accrued. The interest accrued during the moratorium period is an additional payment you have to make while the repayment resumes. If you have the capacity to pay the loan within the moratorium period, it is advisable that you do not default on any EMI repayment.
The loan moratorium period provides the borrower with some temporary relief during the crisis but it has some drawbacks as well. They are as below:
Before you opt for a loan moratorium, make sure you consider the following factors:
RBI’s loan moratorium provided much-needed relief to countless self-employed and salaried individuals from impending financial burdens. Borrowers expecting payments could repay their loans for an additional interest without impacting their credit score.
People facing trouble repaying their home loans can transfer them to Navi for more affordable interest rates. Simply download the Navi App for an interest reduction of up to 5% with a balance transfer.
Ans: Banks provided the following three options for loan repayment:
One-time repayment at the end of six months
Higher EMIs every month
A longer tenure with the same EMI
Ans: Yes. Borrowers who availed of the loan moratorium facilities could get the loan restructuring facility for up to two years if eligible.
Ans: No. Borrowers could only get a loan repayment relief for six months and had to pay an additional interest.
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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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