Extension of Loan Moratorium and it’s Impact

A moratorium is that time period of the loan during which the borrower is not required to make any repayment. A Moratorium is an ‘EMI holiday’ to debtors authorized by the banks or lending institutions. It is a waiting period before which repayment by way of EMIs begins. Usually, the repayment of the loan begins after it gets disbursed and payment have to be made each month but in case of moratorium period, the payment starts after some time or the time specified. Example: Student Loan.

On May 22, the RBI permitted the bank and NBFCs (NON-Banking Financial Comapanies) to allow a further 3 month moratorium i.e. from June 1 to August 31, 2020, in respect of term loans outstanding as on March 31, 2020.

The banks also clearly said that it’s upon the discretion of the borrower, if you have enough cash flow it is advised not to avail of this extended moratorium. Opt for it only if you are facing financial problems.

Salient features of the notice

The interest on the loan will not be waived off due to an increase in loan moratorium period by the institutions. Example – consider that you took a loan of Rs. 5 Lakh at an interest of 12 per cent per annum for a tenure of 5 years.  Over the five year term, the EMI on this loan works out to Rs. 11,122 and the interest payable works out to Rs. 1.67 lakh, taking your total dues to Rs. 6.67 lakh. Now the twist comes, if you avail a three-month moratorium, your EMI rises to Rs. 11,459 and you end up paying Rs. 6.87 lakh to the bank.

So, basically its only a grace period and if you opt for the moratorium extension, you need not pay the EMIs for that six months (March – August) but you will have to continue paying the accrued interest on the loan EMIs for these six months.

Three options were given by the Banks:

  1. Make one-time payment of the accrued interest payable at the end of moratorium period;
  2. Add the accrued interest to the outstanding loan and pay the same by increasing the amount of EMIs to be paid for the rest of the loan tenure;
  3. Add the accrued interest to the outstanding loan and pay the same amount of EMI for a longer tenure thereby paying back the full amount.

Merits of opting Loan moratorium:

  • The Bank will not charge any penalty even if you are not paying the loan during this 6 month period.
  • If you don’t repay your loan, your credit score and credit history will not see an adverse impact during these 6 months.
  • Temporary relief but prolonged EMI burden.

Conclusion

The Loan moratorium is an ‘EMI holiday’ granted to the people, who are facing financial problems or the people who are not in a position to pay their EMIs and are severely hit by the nationwide lockdown on account of COVID-19. The banks also clearly said that it’s upon the discretion of the borrower, if you have enough cash flow it is advised not to avail of this extended moratorium. Opt for it only if you are facing financial problems. The one’s who choose to pay their dues after the moratorium period will still have to pay the accrued interest as the interest on the outstanding amount will continue to accrue throughout the moratorium period.

Several issues were raised by the individuals and companies to the government during these hard times, as we are slipping down in poverty and lost our jobs due to this pandemic COVID-19. These poor, middle class, small institutions and micro industries stand in front of the government and asked for the relief. Then RBI after discussion with the officials and institutions find out a way to this situation by increasing the moratorium for the period of 6 months, i.e., till August 31st, 2020. The Relief was given on all kind of loans such as car loans, home loans, corporate loans and credit card loans or EMIs etc. Lastly, after all the calculations and analysis the above increase in loan moratorium period will become a real burden in future to all the borrowers present out there.

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