A Detailed Guide On What Is A Loan Moratorium In India

Loan Moratorium

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?

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

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

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.

FAQs: What Is A Loan Moratorium In India

1. What lenders are allowed to offer the RBI’s EMI moratorium?

Commercial banks such as the regional banks, rural banks, and small finance banks can opt to offer a moratorium period. Adding to the list, cooperative banks and also the non-banking financial companies (NBFCs), and every Indian financial institution could offer borrowers the moratorium period.

2. Would the EMI deductions be automatically deferred or does the borrower have to opt for it?

This is up to the bank as RBI has permitted all banks to decide how they would like to offer the moratorium to their customers. Where some might raise a request to ‘opt in’ for the moratorium, the others have set moratorium offer as a default option for a few products, so you might need to raise a request to ‘opt-out’ of the scheme if you wish to keep your repayment cycle unchanged.

3. When can the borrower opt for the EMI moratorium offer?

One can opt for the EMI moratorium three days before the loan amount being deducted.

4. Is the moratorium period a waiver of EMIs?

No, they aren't. However, they are a deferment of EMIs for the repayment tenure with the due dates extended by 3 months from the expiry of the moratorium.

5. Does the moratorium period include interest and principal components of the loan?

Yes, they do. A moratorium period includes both, interest and principal component of your EMI.

6. From when is the moratorium applicable?

A moratorium period is applicable on outstanding loans from the 1st of March, 2020.

7. How to opt for an RBI moratorium?

In case your bank has advised or raised a request for availing of the moratorium offer, simply visit their website or click on the link shared by your bank to fill a form therein to opt for the scheme. You can also visit the bank physically to raise this request. On the other hand, in case the bank has set a moratorium as a default choice on your loan amount but you do not wish to avail of the scheme? Simply, visit the bank’s website and fill a form to opt-out of the scheme.
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