What is Moratorium Period? What it’s all about!

What is Moratorium Period? What it’s all about!

moratorium period is the time phase during a loan term in which the borrower is not required to make a payment against the loan issued. It is the waiting time period before the borrower starts making fixed monthly installment payments to the lender or the bank. 

What is Moratorium Period? What it’s all about!

Issuing loans to borrowers is the way by which banks accumulate their profits, and that is also how they can afford to award interest to their customers on deposited money. Loans are given to borrowers by checking their credentials, their income, credit history, and their ability to repay the loan in the prescribed time. On top of this loan, a nominal interest is also charged by the bank on the amount borrowed. This interest is accumulated on the principle amount annually and has to be duly paid off by the borrower.

The loan amount, along with interest added to it, must be paid by the borrower in the form of Equated Monthly Instalments (EMIs), which are fixed payments that the borrower makes to the lender every month around a fixed date.

Ler’s take the example of the education loan to understand it!

In the case of specific loans like education loans and such, the loan amount cannot be paid by the borrower until after his/her education has been completed and he/she starts earning. Therefore, the bank offers a moratorium period to the borrower, under which the latter does not have to start making repayments to the bank until after the moratorium period ends.

This period, in the case of an education loan, may extend to the time until the student completes his/her education and starts earning personal money. The interest that is generated over this moratorium period is disbursed and compiled at the end of the period, and added to the principal amount in the end. The final amount is then considered to calculate the EMIs that the borrower has to pay the bank to repay the loan.

Some banks may also offer some discounts on the loan if the borrower agrees to pay only the annual interest over the moratorium period and keep the principal amount intact until after the period is over.

Recent developments according to the Reserve Bank of India (RBI)

The Reserve Bank of India has allowed all lending institutions around the country to offer their borrowers a three-month moratorium period on the repayment of all kinds of loans that they may have issued. The central bank also instructed lending institutions to extend this offer to all their customers for any EMIs or credit card bills that the customers may have defaulted upon from March 1, 2020, to March 31, 2020. During this entire month, all customers have been extended the relief of not paying their due amounts without being categorized defaulters by the bank. Read on to know more:

1. What is the relief package announced by the Reserve Bank of India, and how does it affect the common man? 

This relief package has been announced by the Reserve Bank of India (RBI) to mitigate and control the losses brought about by the spread of the COVID-19 pandemic across the globe.

The Coronavirus, as it is popularly known, spread around the world from the Wuhan district of China, and has recorded more than 20000 casualties and more than half-a-million active cases. A highly lethal outbreak in India has hampered economic services and transactions from the consumers to the top companies involved in the market. For combating this disruption in the cash flow and the shortage of capital in the market, this relief package has been temporarily rolled out. It targets businesses and individuals that might potentially suffer from the spread of this disease and might not be able to pay back their loans during this period.

2. Does this facility include all loans, including Term Loans? 

This facility has been rolled out to All Term Loans, including Crop Loans, Retail Loans, Agricultural Term Loans, and loans under Pool Purchases and Cash Credit/Overdrafts are eligible to avail the benefits under this relief package rolled out by the Reserve Bank of India.

To avoid unnecessary hassle concerning paperwork across the ranks, this facility has also been extended to all the borrowers by extending the repayment of their Term Loan repayments by 90 days. The original repayment of these loans will get extended by a period of 3 months. This rescheduling of loan payments will be applicable all across the policies of every bank, including those applying to all Term Loans, irrespective of the Segment, and the tenure.

3. How does the tenure of the loan I already have to get affected by this policy? 

The tenure of the loan term shall be extended by three months, under any conditions. If these three months happen to go beyond the maximum stipulated period for a product, as mentioned in the Loan Policy of the bank/the loan policy applied to that specific loan, that period may be extended by the banks for three months without the need of seeking permissions, approvals and unnecessary paperwork.

4. Who are defaulters, and how does the relief package prevent the bank from designating me as one? 

Defaulters of the bank are people who have not paid their EMIs, credit card bills, or any other credit/loan they might have accrued from the bank with the backing of their credit history and credit score. If the bank recognizes defaulters within its lending system, the bank reports such defaulters to the Credit Bureaus. For corporate or business loans amounting to 5 Cr. and above, the Banks report this situation to the RBI.

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As a result of this relief package, the banks will not recognize defaulters during the period of March 1, 2020, to March 31, 2020. They will not be reported to the said authorities for three months. The Bank will charge no charges or any other penalties. Similarly, the borrowers will not be liable to pay any kind of damages to their lenders during this period concerning their repayments, which fall within March 1, 2020, and March 31, 2020.

5. Does this mean businesses /customers should take the benefit of this policy? 

Customers and borrowers must take into account, however, that this relief package does not mean or imply monetary benefits for them; it rather just delays the payment of their dues to the bank until after the three months are over.

For instance, if you have taken a loan worth Rs. 10,000 with XYZ Bank, at an annual interest rate of 12%. You pay Rs 100 every month as interest. Now, if your payable interest falls within the period of March 1, 2020, to March 31, 2020, your payment of interest will be disbursed for three months, and you will be liable to pay Rs. 303.01 at the end of the moratorium period. Similarly, at 10% interest, you will be required to pay Rs 83.3 per month or Rs 252.10 after three months.

6. What about credit card debt? 

This package/policy by the Reserve Bank of India also extends to the Credit Card dues of the customers. Under normal circumstances, credit cardholders are required to pay the minimum amount due to the banks at the stipulated time. Failing to do that gets them reported to the Credit Bureaus, but this is not the case anymore. The credit cardholders will be charged their interest on the amount due to the bank. Customers must, however, remember that the interest rates on credit cards are usually higher than the interest rates applied to any other loan/credit that you accrue from the bank and all decisions regarding these credit cards must be taken accordingly with the utmost care, after reading and becoming aware of the policies applied to the card.

7. In what way have businesses been given relief? 

Businesses may also request the top bank to assess their Working Capital requirements from the beginning, on account of the shortage in income/capital/profits that the market has endured. The disruption of the cash flow must also be taken into account by both parties. Decisions on these matters will be taken at the prerogative of the Bank on a case-to-case basis depending on the requirement of the fulfillment of such request and the magnitude of loss that shall be incurred in the case of the denial of the same.

8. Are NBFCs/MFIs/HFCs eligible under the “Easing of working Capital Financing”? 

At present, HFCs, NBFCs, and MFIs are not eligible under the “Ease of Working Capital Financing” scheme rolled out by the RBI. The Bank has, however, provided sufficient liquidity to support these Financial Intermediaries.

The Bank has recently introduced Targeted Longer-term Refinancing Operations. All the liquidity that has been obtained by Banks under this scheme must be used in investment-grade corporate bonds, non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020, and commercial paper. Banks shall also be required by law to accumulate up to 50% of their incremental holdings of eligible instruments from the primary market issuances and the remaining 50% from the secondary market, including from mutual funds and non-banking finance companies. Exposures under this facility will also not be able to support NBFCs, MFIs, HFCs, etc. Investments made under this facility will be classified as held to maturity, even in excess of 25% of the total investment that is allowed to be included in the same Held To Maturity portfolio.

9. What do I do if someone from the bank approaches me? 

If you are approached by an authority representing the Bank or the Collection Agent appointed by the said bank you have a loan issued in, you should not be worried or upset in any case. You should duly inform them of your wish to avail of this offer rolled out by the Reserve Bank of India.

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EMI moratorium: Should you avail it?

With the outbreak of the global pandemic COVID-19and the lockdown situation, according to RBI’s COVID-19 regulatory package, it has provided the borrowers with an option of not to pay the monthly installment of EMIs or credit card dues until May 31, 2020.

The borrower has an option to avail of this facility under which he/she does not have to pay any kind of EMIs until May 31, 2020. However, this scheme does not affect the interest rate. The interest will keep on adding to the principal amount till 31st May 2020.

Let us take an example that the house loan granted by the bank is 50 lakh, and the interest rate levied on it is 9% per annum. At the end of 3 months, the interest for the 3 months will be added along with the principal amount. So the total amount that you have to repay is the principal amount plus the 3 months interest. The interest for 3 months will have amounted to Rs 1.13 lakh. Therefore, the loan amount repayable at the end of 3 months will become the principal amount along with the 3 months interest, ie. Rs 51.13 lakh.

Although the RBI’s COVID 19 regulatory package advises banks to extend the loan repayment schedule structure by 3 months due to EMI Moratorium, you have to pay more EMI installments because of the extra added interest amount for 3 months.

Let’s suppose for the above example, the remaining tenure of your home loan was 15 years or 180 months. EMI that has to be paid is Rs. 50,713 every month. Keeping the remaining loan tenure the same at 180 months, your EMI amount that is pending will increase to Rs 51,862 after the moratorium period of 3 months. An increase of approximately Rs 1,150 per month will be added to each installment. Over a period of 180 months, this amount will be increased to Rs 2.07 lakh extra. If you want to keep the EMI amount the same and change the tenure, you will have to pay 189 EMIs instead of 180 EMIs. You have to pay 9 more EMI installments over the original tenure of 15 years, which is 180 months. To avoid paying the 3 EMIs in 3 months, you have to pay 9 more EMIs later.

Let us suppose a personal loan was granted by the bank with an outstanding amount of Rs 5 lakh and the remaining tenure of 36 months at an interest rate of 12% per annum. The EMI will be Rs 16,607 per month. EMI installment per month will be increased from Rs 16,607 to Rs 17,110 if the tenure of the loan is kept as 36 months. The repayment schedule gets shifted by 3 months, as mentioned in RBI’s COVID 19 relief package if you opt for a moratorium. You have to pay 36 EMIs of Rs 17,110 each if you opt for the moratorium of 3 months. If you want to keep the EMI amount constant and change the tenure, you will have to pay approximately 38 EMI installments to repay the loan. It will become difficult to repay all the EMIs together in one shot and therefore end up paying heavy interest for the pending dues for accumulated months. So it is better to clear off the dues on the current due dates.

After the announcement of the RBI’s COVID 19 regulatory package, if you do not clear your credit card dues within the tenure of 3 months from March 2020 to May 2020, the bank cannot report your case to the credit bureaus. However, the banks and credit card companies may charge a very high rate of interest on the outstanding due amount. The rate of interest on credit cards usually ranges from 36% to 42% per annum that depends on the individual financial institution. If you have the money now to repay the credit card expenses, why should you pay a higher rate of interest while clearing your dues later? There is also an 18% GST levied on credit card interest.

However, RBI regulatory package has no mention of the late fees and penalties for credit cards. You must seek clarity from the bank about late fees and penalties. In the case of your credit card dues, you can pay the minimum amount due on your credit card to the bank instead of the entire due amount. Once you make a minimum payment of your due amount, the bank cannot charge any late fees or any penalties from you. It cant report the case to the credit bureaus since a minimum amount of the due has been already paid.

Therefore, if you avail the RBI COVID-19 relief and continue to make a purchase using your credit card, these are the following points you should have in your mind:

  1. You have to pay interest for existing purchases from day 1.
  2. You have to pay interest for future purchases from day 1.
  3. You may be charged late fees and penalties.
  4. You have to pay 18% GST that is levied on your credit card.

Keep the above clauses in mind. Since the pandemic has created cashflow problems, it is advisable not to avail the RBI relief and pay credit card dues in full.

Complete list of Banks and what they are offering under the moratorium period?

Here is a curated list of banks that have announced the 3 months moratorium on all term loans.

State Bank of India: In terms of the RBI COVID-19 regulatory package, SBI has initiated steps to defer the interest and installments of EMIs on term loans falling due between 1.03.2020 and 31.05.2020 and extended the repayment period by 3 months. The interest charged on the Working Capital facilities for the period of 1.03.2020 to 31.05.2020 is also deferred to 30.06.2020.

Punjab National Bank: Punjab National Bank presented a relief scheme for its customers after the announcement of the RBI’s COVID 19 regulatory package. The bank has decided to defer payments of all installments on the term loan and recovery of interest on cash credit facilities falling due between March 01, 2020, and May 31, 2020.4.

HDFC Bank: HDFC Bank has also decided to defer all payments of EMI installments on terms of loans as well as credit card dues. The bank has provided a link as well as a contact number for its customers who can seek assistance if he/she wants to avail of the moratorium.

Union Bank of India: Union Bank of India is extending COVID-19 Relief to the customers to defer their installments and interest falling due between 01.03.2020 to 31.05.2020 for 3 Months.

IDBI Bank: IDBI Bank has also extended its loan payment tenure for the customers by three months, as announced by RBI. However, it has also announced that borrowers whose cashflows are not impacted due to the lockdown situation can continue to pay the EMI installments as scheduled. IDBI Bank extended the moratorium on term loan installments and interest for 3 months and has deferred interest on working capital loans of borrowers.

Bank of Baroda: After the announcement of RBI’s COVID-19 Regulatory Package, Bank of Baroda has provided its customers a moratorium of 3 months on payment of all installments falling due between 01.03.2020 and 31.05.2020 for all term loans, including corporate loans, MSME loans, Agricultural loan, Retail loan, Home loans, and Personal loans. The bank has also declared that the interest during the moratorium period will continue to be added to the principal amount.

Canara Bank: In terms of the COVID 19- RBI package, borrowers are eligible for moratorium and deferment of installments of EMI for term loans falling due from 01.03.2020 to 31.05.2020 and repayment period gets extended accordingly. SMS has also been sent to customers by the bank to avail of this facility.

Central Bank of India: Central Bank of India has allowed a moratorium of 3 months on payment of installments in term loans, which includes principal and interest components, bullet repayments, EMI, and credit card dues falling due between 01 March 2020 and 31 May 2020. The repayment schedule for term loans and the tenor to pay the remaining due amount has been shifted by 3 during the moratorium period.

UCO Bank: UCO Bank has also shifted its repayment schedule for term loans by 3 months. The next installments can be paid in June 2020 if a customer avails of this scheme. However, the bank also announced that the customers who want to continue with paying their EMI installments might do so as scheduled.

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Syndicate Bank: Syndicate Bank announced that EMI installments of all term loans, including home loans, vehicle loans, MSME loans falling due between 1st March 2020 and 31st May 2020, had been shifted by 3 months. Customers can have the chance to opt-in or opt-out of this scheme if they wish.

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