Introduction 

The Reserve Bank of India (RBI) recently allowed banks in the country to provide a three-month moratorium on fixed-term loan and EMI payments to help millions of people with bank dues during the novel coronavirus pandemic. 

With India being in lockdown currently to contain the spread of COVID-19, the moratorium will help to tide over the economic fallouts. The three months moratorium has been granted for term loans outstanding as on March 1, 2020. The banking regulator, however, did not order banks to provide such a relief. It gave the option to banks to take a call on whether they are in a position to extend the measure for customers.

Is Moratorium a Relief?

Moratorium period is a relief because it 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. 

Many economic experts believe the terminology used by the RBI in the matter raised many doubts. Some reports show banks are still not ready to take any action on this announcement.

While 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.

Who Should Avail a Moratorium?

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.

The moratorium is not a waiver of any kind. So, your interest will continue to accrue for the period of the moratorium. Also, the interest due during the period of the moratorium will get added to your outstanding amount and therefore will increase your burden when the moratorium will get over and you will start paying your EMIs. Therefore, you should opt for it only if you are facing a liquidity crisis else it will be better if you continue paying your EMIs regularly.

Which Institutions Offer Moratorium?

The RBI has asked all banks, financial institutions including housing finance companies, non-banking finance companies, small finance banks, regional rural banks, small finance banks, local area banks to provide moratorium. So, if you have a home loan from a bank such as SBI or housing finance company such as HDFC, both would provide you with a moratorium.

What Happens Once Moratorium is Over?

During the moratorium, you will not have to pay EMIs or credit cards due between 1 March and 31 May even if you can. Those who want to continue paying the EMI or credit card dues will be able to do so. Once the moratorium is over, you will have to continue making the EMI payments which will include accrued interest for the moratorium period as well.

FAQs

  1. During the moratorium, will non-payment result in an impact on my credit score?

Once relief has been granted by your bank, non-payment will not result in any impact on credit score.

  1. 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.

  1. Will you be charged a higher interest rate if you take this extension?

The banking regulator has clearly said that if you don’t pay your EMIs or credit card bills and choose to extend the loan by three months, you will end up paying interest cost for these three months on that loan.

  1. 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.

  1. What kind of loans does the moratorium cover?

The RBI policy statement explicitly mentions term loans, which includes home loans, personal loans, education loans, auto and any loans which have a fixed tenure. They also include consumer durable loans, such as EMIs on mobiles, fridge, TV etc.

  1. 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’.

End Note

A moratorium is provided to help borrowers tide over the liquidity issues due to the pandemic. This is not a concession and will not lead to any change in the terms and conditions of the loan. The moratorium means you don't have to pay your EMIs for that period and no penal interest will be charged.