Of the financial regulations and policies brought about during the Coronavirus-led pandemic, ‘moratorium’ struck a chord with the general masses and became the year’s financial buzzword. A loan moratorium is a temporary suspension of loan repayment. It is a period wherein you are entitled to get a break on your loan repayment.
The concept of a moratorium has existed in the banking sector for decades. During the moratorium period, you can stop paying Equated Monthly Installments or EMIs for a certain time, as specified by the policymaking authorities.
A moratorium is a temporary halt of business or a suspension of some law or regulation. Moratoriums are often imposed on an activity such as a debt collection process.
For instance, incase of natural disasters like an earthquake or flood, an emergency moratorium on some financial activities may be granted by a government.
In genreral, a moratorium removes a financial hardship and is lifted when normalcy returns.
For example, if a company is facing a financial hardship, it can place a moratorium on certain business activities at lower costs.
A Moratorium on loan is a specified period during which the borrower is not obligated to make EMI payments of their loans as mandated by the Reserve Bank of India. The moratorium period in loan postpones repayment and gives the borrower a grace period during which they can choose to not make EMI payments for a loan. Apart from the Moratorium on Loan, which was recently provided as a relief post the COVID-19 pandemic, it has been widely used for some types of credits such as education loan to borrowers who require a certain grace period before they can start repaying the loan.
The important thing to remember here is that the interest rate on the EMIs missed will continue to accumulate and will have to be repaid when the moratorium is lifted. Thus, the moratorium period will allow you to skip the repayment of the principal amount and not that of the interest. Also, a moratorium facilitates the borrower to not pay the dues for the pre-decided period without being termed a defaulter.
Generally, missing an EMI while repaying a loan can lead to a dip in your credit score. However, with a moratorium period, borrowers can temporarily stop repaying their loans without lasting impact on their ability to borrow in the future. Note that use of the moratorium will still reflect in the CIBIL report and other credit reports, but banks generally do not consider it as a mark upon the creditworthiness of the individual or entity.
Let us try and understand the concept of the moratorium period with a simple example.
Assume that Mr. Ram was given a home loan of Rs 20 lakh by HDFC bank in January 2020. Mr. Ram agrees to repay the loan in 24 EMIs spanning over 24 months, with the first EMI to be paid in the following month in February 2020 and subsequent payments at the beginning of each following month.
However, in April 2020, the spread of COVID-19 led to a nationwide lockdown in the country while economic activity came to a standstill. In light of this, the Reserve Bank of India (RBI) announced a moratorium on EMI payments from April 2020 to July 2020 without any penalty being imposed on the borrowers. As a result, Mr. Ram could defer his EMI payments until July 2020 and start repaying the loan from August 2020. Here, the ‘Moratorium period on loan’ provided by RBI was four months.
When the COVID-19 hit us, the RBI stated that choosing the moratorium was voluntary, and anyone with an outstanding loan with EMIs due between March 1, 2020 and August 31, 2020 would be eligible to avail of the moratorium.
Similarly, whenever the RBI or banks announce a moratorium, they carefully lay down specific guidelines and eligibility criteria, mentioning the details about who is eligible to avail moratorium. These eligibility criteria are dynamic and change whenever a moratorium is announced due to economic distress.
The RBI may impose a moratorium and borrowers may become eligible for a moratorium in cases of natural disasters, economic catastrophes, wars, and even terrorist attacks. However, it is important to note that a moratorium is not an obligation of the banks or a right of a customer. It is purely the lender’s discretion whether to offer a moratorium or not.
Since the RBI’s guidelines on moratoriums are dynamic to the circumstances they are announced in, let us look at the norms announced March 2020 to understand the general guidelines:
Here are some of the key advantages a borrower is entitled to when they choose to accept the moratorium.
A grace period is frequently confused with a moratorium period in loan. It’s vital to remember that a grace period is a period after a payment is due, during which you can pay without penalty. In other words, if borrowers do not make a payment during the grace period, they will be penalized – such as a late fee, a credit rating drop, etc.
A borrower is not compelled to make a payment during a moratorium period in loan. Additionally, the length of a moratorium period can range from weeks to months, whereas the length of a grace period is typically 15 days.
A Moratorium loan means that you can get short-term relief from the repayment of loans. Although a moratorium temporarily halts EMI repayment and assists those facing difficulties repaying their loans, it is entirely optional and not mandatory for all borrowers.
Additionally, borrowers must remember that applying for a moratorium does not provide any relief for interest amount during the period of the moratorium. Hence, it is advisable to avoid a moratorium if you can sufficient the means to pay the EMIs on time.
Ans: No, availing of a moratorium in any situation is not mandatory. It is a voluntary decision and depends completely upon the borrower’s discretion who can choose to not avail the moratorium.
Ans: For most education loan borrowers, a moratorium period is a standard feature which allows the student a specified time after they complete their education, get a job, and start repaying the loan. However, for other loans, moratoriums may be provided on the basis of the bank’s policy and the circumstances in the country.
Ans: The maximum period of moratorium depends on the latest guidelines provided by RBI. For the moratorium imposed in March 2020, the maximum tenure was 6 months.
Ans: No, grace period and moratorium period are different concepts at the core. While the grace period can lead to a penalty and a dip in the borrower’s credit score, there is no such penalty for a moratorium.
Ans: No, the interest component of the loan is not waived off during the imposition of a moratorium. It gets added to your subsequent EMIs after the moratorium is lifted.
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