INTRODUCTION On account of the COVID-19 outbreak and the financial bump that it caused, the Reserve Bank of India (RBI), attempted to provide some relief to those struggling with liquidity by announcing some relief, in March, 2020, as a moratorium on term loans for 3 months, ending on May 31, 2020. In May, the RBI extended this moratorium further by 3 months, up to August 31, 2020.
So what is a moratorium? A moratorium is the act of postponing an activity and should not be confused with a waiver. The moratorium relief can be called off now, as the economy has shown signs of recovery. Many borrowers now are in a position to repay their debts.
MORATORIUM: A STARK RELIEF OR A COLD COMFORT The six month (extended) moratorium allowed borrowers to defer their EMI payments for a period of time (March - August). This shouldn't be mistaken for a total waiver. If someone's installments were due between March 1, 2020 and August 31, 2020, the RBI has permitted the bank to allow postponement of the repayment. Although, the banks weren't obliged to do so. Different banks had their own criteria for granting an EMI holiday.
Howbeit, one will be paying more as interest later, if they choose to avail of the moratorium, the advantage of seeking this moratorium is that it will not show up in your credit score. Neither there will be any penalty charged nor the credit score will be affected in this tenure. The moratorium facility was extended to all the term loans; it doesn't matter if one have multiple loans running. However, the moratorium will be applicable to both principal and interest amount. Perhaps the self-employed borrowers may find it tough to repay the extra interest accrued, due to the business losses amidst the lockdown. But in the moratorium period, a self-employed borrower can divert the monthly installment amount and use it somewhere else. Thus, there was no need to be worrisome for one’s liquidity straight away. After the moratorium period, the borrower can go back to repaying the monthly dues. Withal, one must keep this in mind that the moratorium was not an interest waiver, one will not get any discount. If the borrower had the financial capacity to keep repaying, they must do so as it will save the extra sum of money. But, in case the borrower suffered because COVID-19 pandemic and lockdown had imposed levy on his finances, the borrower could've availed the moratorium, if the bank provides it.
All lending establishments i.e. the commercial banks (even regional rural banks), small finance banks, co-operative banks, NBFCs including housing finance companies, have been permitted to allow the moratorium by the RBI, increasing the scope of benefitting the needy. Also, the moratorium facility was made available for NRI customers as well. Since the RBI used the word ‘permitted’ and not directed, people had to request their banks (in most cases) to grant them the moratorium, giving the borrowers option to opt-in or opt-out the facility. Hence, a borrower can avoid paying extra money if his financial condition permits. As per the RBI circular, the moratorium was permitted for all i.e. individuals and corporate, but banks came up with their own parameters of determining eligibility. For those who get salary the economic ill-impacts we're pay-cuts, delay in salary or layoffs. Therefore, to ease the financial stress, this facility was made available to salaried borrowers too.
CONCLUSION
Moratorium is not a new concept. Most borrowers who buy an under-construction property ask for a moratorium period on loan. And although the RBI's moratorium wasn't as eased up as a waiver but it still relieved a lot of borrowers who we're getting squashed due to the pandemic and lockdown and were at the brink of insolvency.
The loan moratorium though faced a lot of criticism but the fact that it was a thoughtful step by the RBI cannot be avoided. Any borrower who faced financial difficulty in the testing times of the COVID-19 pandemic, found the moratorium beneficial. Even if the EMI burden increased a bit, but it helped the financially-stressed families to sustain over the immediate economic ill-impact of COVID-19.