In respect and a part of the relief measure during the COVID pandemic, the Reserve Bank of India (RBI) availed a three-month moratorium on term-loan and credit card repayments for Indian Citizens. As a result of which, the lending institutions were directed to defer the customer’s EMIs who are opting for the moratorium period under the lean moratorium scheme.
But, what is it? How does it help the Indians with their EMIs? What are the eligibility criteria? Is it really that beneficial? Let’s find out answers to all such questions with the help of this article.
What Is A Moratorium? And, How Does It Work?
It is a temporary suspension of activity up until any future events warrant lifts the suspension or up until the related issues have been resolved. These moratoriums are in most cases enacted in response to the temporary financial hardships that the borrowers face due to an unforeseen change in the environment, here, in the present times, the COVID pandemic.
A moratorium on loans often affects in response to a crisis, disrupting a normal routine of nature. These include earthquakes, floods, droughts, or disease outbreaks. Due to this, an emergency moratorium on a few financial activities could be granted by the central bank or the government which lifts after normalcy returns.
What Are The Eligible Criteria For EMI In The Moratorium Period?
According to the Reserve Bank Of India (RBI), a circular dated March 27 talks about all individual borrowers being eligible to opt for a loan period a moratorium on their EMI whose loan, outstanding as of March 1, 2020.
How Does A Loan Moratorium Of The RBI Work?
The borrowers who choose to opt for a loan moratorium are not required to pay their EMIs in that period. Also, during the moratorium period, the interest is not waived off and continues to accrue on the outstanding amount. This means, although they need not pay their debts during the moratorium, they will be expected to pay additional interest on the months for which the EMI moratorium was taken.
Let’s understand the moratorium period via an example:
Say Nicole provides a sum of $500,000 loan by Bank A in January 2020 in order to expand her restaurant business. She agreed to pay a fixed monthly payment of $100,000 over six months that make a total repayment amount of $600,000 in order to secure the loan with the first payment due in February 2020 followed by every month.
Having followed the pattern, in mid-March 2020, the restaurant business is forced to shut due to the outbreak of the COVID pandemic. So, bank A opts to grant Nicole a moratorium period from mid-March 2020 to June 2020 with no additional charge due to the event.
As a result of which, Nicole is now able to defer her April 2020 payment to July 2020.
Moratorium Period And The Present Scenario
Here are a few incidences that followed in the news with regards to the moratorium period and the COVID pandemic:
- As a result of the pandemic, the National Student Loan Service Centre in Canada had announced allowing the students to pause their student loan payments with effect from March 30, 2020, up till September 30, 2020. This was a part of the rescue package for the Canadian economy.
- RBI or the Reserve Bank of India offered a loan relief for home loans, personal loans, education loans, etc as a part of the moratorium period from March 1, 2020, to August 31, 2020. The borrowers were not required to make payments during the moratorium period, however, their interest was not waived off and continues to accrue
Is A Moratorium Period That Beneficial For The Indian Citizens?
Irrespective of the interest, the ability for an individual to defer their payments into the future does for sure offer greater financial flexibility.
Nevertheless, the interest does accrue over the moratorium period that resulted in a huge payable loan amount.
To Conclude: Effect Of The Moratorium Period On The Credit Score
According to a circular that was issued by the Reserve Bank Of India, dated March 27, 2020, if an individual opts for an EMI moratorium, it does not in any way harm the credit score or will not lead to a credit downgrade of the borrowers.