Moratorium: Everything you need to know

A moratorium is a temporary deferment of activity, especially by an official agreement, according to the Oxford Dictionary. This means, that borrowers can, for the course of the moratorium period, stop paying their EMIs, etc., if such a policy has been announced by the country’s banking regulator.

In case the banking regulator offers a moratorium on loans, it means that those who are unable to pay their EMIs for the moratorium period are not to be classified as loan defaulters. However, do note here that this information would have been mentioned in your credit records, even though banks may not judge you negatively for this.

A moratorium has been used as a tool across the world to offer relief to credit borrowers in the face of a natural calamity or financial distress, as an economic slump, in the event of a pandemic, war-like situation, terrorist attack, etc. In certain loan products, a moratorium is a key feature. A prime example of this is education loans. Since students are able to repay their loans only after joining work, banks offer them a specific moratorium period before they have to start repaying their education loans.

What is a moratorium period?

Since it is a temporary suspension of an activity, a moratorium is announced for a specific time frame, known as the moratorium period. During the moratorium period, borrowers can opt for non-repayment of their loans without being branded defaulters. Once the moratorium period is over, they will have to start with the payments, along with the pending payments.

Should you opt for a moratorium?

The answer is no if you have the funds to continue paying your loans. This is because borrowers continue to accrue interest over the unpaid money which ultimately increases their overall loan burden.

Moratorium in India

In 2020, the RBI announced a moratorium for home loan borrowers for three months, between March 1, 2020, and May 31, 2020, and later extended it by another three months, to August 31, 2020, to offer support to banks and borrowers, as the first wave of the Coronavirus infection exacted huge financial costs, forcing millions into joblessness. The time for applying for the first moratorium ended in December 2020. Later, the RBI allowed the moratorium as part of a restructuring scheme, where the loan moratorium could be extended up to a total period of two years.

Loan moratorium in India

In the wake of the COVID-19, the RBI announced an EMI moratorium on March 27, 2020. Following the announcement, the RBI directed all lending institutions to put in place a board-approved policy to refund or adjust the interest on interest charged to the borrowers during the moratorium period.

Moratorium: Key highlights

Coronavirus and impact on credit score

Credit scores of many have been affected and this would be a pain point, not just for the person in question but the banks as well, since recovery has become tougher. Further interest waivers may be important at this stage.

1. What does a 6-month moratorium on repayment mean, for home loan borrowers?

A six-month moratorium allows you to defer your EMI payments by a period of three months. This should not be mistaken for a total waiver. If your instalments were due between March 1, 2020, and August 31, 2020, the RBI has now permitted your bank to allow you to postpone the repayment. However, your bank is not obliged to do so. It may or may not allow it.

2. Will I have to pay extra as interest, if I choose the moratorium?

Yes, you will be paying more as interest, if you choose to avail of the moratorium. Let us see how that works.

Suppose you had taken a home loan of Rs 70 lakhs at 9% interest for a period of 20 years from Allahabad Bank. The monthly instalment in this case comes to Rs 64,400. In case you choose to take the moratorium for three months, the interest will continue to accrue which comes to Rs 1,58,684. This will be added to your overall liability.

Hence,

Principal: Rs 70,00,000

Interest Payable: Rs 82,99,365

Interest for moratorium period: Rs 1,58,684

Total amount payable: Rs 1,54,58,049

Total amount payable if moratorium not availed: Rs 1,51,15,396

While you will be paying a higher amount when you repay the EMIs, the moratorium on housing EMIs will help you rearrange your finances in the short term. On the other hand, if you do not opt for the moratorium, you would end up saving Rs 3,42,653.

3. Will moratorium be applicable on principal repayment, interest repayment or both?

The moratorium will be applicable to both principal and interest, that is wherever you are paying either EMIs or Pre EMIs. The interest, at the applicable interest rate, shall keep on accruing on the outstanding portion of the loan during the moratorium period.

4. Will opting for the moratorium affect my credit score?

No, the advantage of seeking this moratorium is that it will not show up as a default in your credit score. Further clarifications are awaited from financial institutions.

5. Is there any penalty that will be charged

No, neither will there be any penalty charged nor will your credit score be compromised during this tenure.

6. What if I have multiple loans running?

The moratorium facility will be extended to all your term loans. However, you must check with your respective banks, whether they would want you to opt in or opt-out of this facility.

7. What will be the effect of a 6-month moratorium on the self-employed?

In light of the example given above, you could say that the extra interest accrued is a small price to pay, given that some self-employed borrowers may find it tough to repay, with most businesses suffering losses due to the lockdown. In the six months, a self-employed businessman/woman can divert this EMI amount and use it elsewhere. Hence, there is no immediate worry of losing out on one’s liquidity. After a period of three months, the borrower can go back to paying his monthly dues with the knowledge that he/she will be now repaying a higher amount.

8. What will be the impact of a 6-month moratorium on new borrowers?

It will have the same effect, as on any other section. You will be able to defer your payments by three months. However, you should know that since it is not an interest waiver, you are not getting any discount. If you have the financial appetite to keep repaying, you must do so. This will help you save some money. However, if you are suffering because COVID-19 has taken a toll on your finances, you should go ahead and avail of the moratorium, if your bank is offering the same.

9. Is the moratorium meant for only nationalised banks, or all banks in general, including co-operative banks?

All lending institutions that are all commercial banks, including regional rural banks, small finance banks and local area banks, co-operative banks, all-India financial institutions, and NBFCs including housing finance companies, have been permitted to allow the moratorium.

10. Is this a loan waiver (for three months) or a deferment?

Note that the RBI has only agreed to a deferment of the term loan. There is no waiver or discount or concession. Deferment also accrues charges.

11. What if I have already paid my EMI for the month of March 2020?

Most borrowers give the Electronic Clearing Service (ECS) mandate for the first week of a month. Therefore, for many an EMI that was due in March, would already have been paid. For such borrowers, EMIs can be deferred by two months only – that is, for April and May 2020 (in the case of a three-month moratorium).

12. What if my EMI was due on March 28, 2020?

You may want to check with your respective bank about refunds. For example, ICICI Bank has said that it may consider refunding EMI for March if it was debited post-March 27, 2020. ICICI Bank guidelines read as follows, “EMI paid prior to Mar 27, 2020, will not be refunded. However, if any EMI is debited after Mar 27, 2020, and the borrower customer opts for moratorium then such EMI may be considered for refund at the request of the borrower/ customer.”

13. Is a moratorium facility available for NRI borrowers?

Yes, the moratorium facility is applicable for NRI customers as well.

14. Will the banks automatically apply the moratorium, or does the borrower have to approach the bank?

Individual banks will come up with their own criteria. Experts opine that since the RBI has used the word ‘permitted’ and not directed, most people may have to request their banks to grant them the moratorium. State Bank of India however has already allowed all borrowers to avail of the moratorium, irrespective of whether they need it or not. There is clarity awaited from other banks. RBI has asked banks to prepare policies approved by their board to provide relief to all eligible borrowers.

15. Is the moratorium applicable to individuals, or corporates too?

As per the RBI, the moratorium is permitted for all but banks can come up with their own parameters for determining eligibility. This confirmation and set of guidelines are awaited from various banks and we will update this article accordingly.

16. Does it apply to those who are getting full salary during the lockdown period?

The economic impact of the COVID-19 may apply to all – both, salaried, as well as self-employed. For the salaried, the economic impact may be in the form of pay cuts, delays in salary payments or even layoffs. Therefore, the RBI has taken this step in anticipation, to ease the financial stress of many. More details are awaited from the individual banks. Eligibility criteria will be announced soon.

17. What can I do if my bank does not offer a moratorium?

As already stated, it is totally up to the banks to offer the moratorium to you. In RBI’s words, “Lending institutions shall frame board-approved policies for providing relief to all eligible borrowers, inter alia, including the objective criteria for considering reliefs and disclosed in the public domain.” Note the word ‘objective’. It is not on a subjective basis but on objective grounds that your bank will establish criteria to roll out this moratorium.

If the bank doesn’t offer this relief, you may run the risk of losing your property, if you do not pay your EMIs.

Loan moratorium: Commonly asked questions

18. Is the home loan moratorium a new concept?

A moratorium is not a new concept. Most borrowers who buy an under-construction property ask for a moratorium period. Agreeable banks usually offer up to three years of moratorium. However, in such cases, banks generally insist that the borrower pay the interest during the moratorium period, also called pre-EMI interest. After a period of three years, the full EMI is paid by the borrower. In the case of a ready-to-move-in property, banks typically give a moratorium of three to six months.

19. How will lending institutions benefit from this move?

Note that lending institutions are not waiving the EMI or the interest. They are simply allowing you to defer your payment for which interest is applicable and accruing. Lenders will profit from this interest. Take, for example, SBI’s term loan book which is big. The bank’s chairman Rajnish Kumar has said that the moratorium move will bring in more. Talking to the media, he said, “Our term loan book is fairly large and I think Rs 2-2.5 trillion gets paid every year, so for three months it would be Rs 50,000-60,000 crores.”

20. What are some of the other term loans?

Term loans are secured loans (at times unsecured) and the borrower must repay the loan with interest, within a definite and specified period of time. Some examples are agricultural term loans, retail loans, crop loans, vehicle loans, education loans, personal loans, etc.

Housing recommends

Please note that if you opt for the moratorium, interest will continue to accrue. Here’s an example to help you.

Dev Sharma availed of a housing loan on March 1, 2020, amounting to Rs 1 crore with a loan tenure of 236 months. If Sharma wants to avail of a moratorium on the instalment of Rs 90,521.00 which is due on April 1, 2020, then, the interest for the month of March amounting to Rs 75,000 will be added to the principal amount and the revised opening principal amount on April 1, 2020, will become Rs 10,075,000. The interest will be computed on the revised principal. Similarly, the interest for the month of April which is payable on May 1, 2020, of Rs 75,562 will be added to the opening principal on May 01, 2020, which will be Rs 10,150,562. The interest will be computed on the revised principal. In this case, Sharma’s tenure will increase from 236 months to 249 months, considering the unchanged rate of interest and instalment amount during this period.

Hence, if you are not financially stressed at this point in time, go ahead and pay your EMIs. This will save you some money.

Important conditions, to avail of the loan restructuring

Both, corporate and retail borrowers, will not be pulled up for defaults for the time being. The option of loan structuring is being offered to those who have been genuinely hit. Note the following:

• If you plan to avail of the restructuring facility, be ready with concrete proof, such as a letter of termination or salary cuts from your office, or your accounts of losses incurred in business, etc.
• The restructuring will be provided to only those, whose debts were not overdue by over a month as of March 1, 2020.
  If you did not avail of the moratorium, you may still be able to restructure your loan.
• Restructuring does not affect your credit score, although it will be reported to the credit bureaus.

Banks’ rules for loan moratorium

Most banks took to Twitter to announce their guidelines about the first moratorium period.

State Bank of India

For details, visit https://www.sbi.co.in/stopemi

Punjab and Sind Bank

For more details, visit: https://www.psbindia.com/document/Advisory.pdf

IDBI Bank

For more details, visit: https://www.idbibank.in/faq-covid-installment.asp

HDFC Bank 

For more details, visit: https://www.hdfcbank.com/personal/pay/payment-solutions/loan-repayment

ICICI Bank

All the other banks have also allowed the moratorium including Canara Bank, Andhra Bank, UCO Bank, Indian Bank, Syndicate Bank, Indian Overseas Bank, Bank of Baroda, Central Bank of India, Oriental Bank of Commerce, Punjab National Bank, Bank of India, Allahabad Bank, Union Bank of India, Corporation Bank.