Impact of 3 Month Moratorium on Loans Repayment

Impact of 3 Month Moratorium on Loans Repayment

The Reserve Bank of India (RBI) sought to cushion both borrowers and lenders against the unprecedented disruption engendered by the Covid-19 outbreak, allowing companies a three-month grace period on loan repayments. It means borrowers don’t need to pay the loan EMI during the moratorium period. All term loans, including agricultural term loans, retail and crop loans, and working capital payments, will be covered by the three-month moratorium. 

Further, availing the moratorium will not entail any change in the existing terms and conditions of the loan. As per the RBI, repayment of credit card dues can also be deferred under the moratorium mechanism. However, in the case of this moratorium, the borrower’s credit rating will not be impacted in any way, as per the RBI statement. So, what this 3-month moratorium means to the loan borrowers, what impact it will have on their financial journey? Let’s find out the same in this post. 

Types of Loans Covered Under Moratorium Period

All term loans, including agricultural term loans, crop loans, working capital and retail loans such as car loan, home loan and personal loan respectively will be covered by the three-month moratorium. Banks will now have discretion in deciding the limits on working capital, with RBI saying that no payment miss should be considered a default and reported to credit information companies. The borrowers of such loans, facing liquidity issues during the 21-day lockdown need not to worry about the EMIs due between 1 March and 31 May 2020. 

The Reserve Bank of India (RBI) has asked all financial institutions, including banks, to impose a moratorium on outstanding term loans and credit card dues. Talking more about the update, a moratorium will be provided against both the interest and the principal during this period, which means the moratorium is applicable on your entire EMI. 

What is the Moratorium Period?

Moratorium simply means a borrower doesn’t need to pay his EMI to the lender during this period and no penal interest will be charged. The EMI payments will restart only once the moratorium time period gets over or expires. This period is also known as EMI holiday. Usually, such breaks are offered to help individuals facing temporary financial difficulties to plan their finances better.

It is to clarify that moratorium is not a concession given by the banks, it is offered just to provide some relief to the borrowers facing liquidity issues in the lockdown phase. But the interest for the period of a moratorium will be added to the principal. Thus, after the moratorium is over, the borrower will have to pay the outstanding amount, which will also include the interest levied for three months. 

What Impact 3-month Moratorium Will Have on Loan EMIs

Once you opt for a moratorium period, you will get the benefit of saving your EMIs for 3 months. Yes, you would have a fair amount of savings hence can use this money for future investments. The borrower’s loan repayment will automatically be reduced as there is no need to pay the monthly installments. But the interest for the period of the moratorium will be added to the principal amount. Thus, no relief for the long-run. Once the moratorium gets over, the borrower needs to pay the due interest of 3 months. 

Is It Beneficial for All-Who Should Go For It?

The moratorium is beneficial for those who are facing liquidity issues and cash flow is not regular due to pay cuts, delayed payments or layoffs due to lockdown. Also, this will provide relief to many individuals, especially the self-employed, as they would have found it difficult to service their loans such as car loans, home loans, etc due to loss of income during the lockdown period. In an ideal situation, missing any EMI payment would hit their credit score badly. But Non-payment of loan EMIs during the moratorium will not impact the credit score, as mentioned by the RBI. 

What If You Have Already Paid the EMI?

Those who want to continue repaying his loan or credit card dues can easily do so as the moratorium is an optional facility. But those who want to take the benefit of the same can opt for a moratorium but what would be the case if someone has already paid the EMI for March. Well, in such a case, the moratorium would be applicable for only 2 months, i.e. April and May. However, the actual conditions of moratorium may vary depending on how different banks implement it.

Conclusion

If you look at the broader picture, it is advisable to continue with your loan repayments as the interest due during the period of the moratorium will also get added to your outstanding amount. This relief is only for 3 months, once the moratorium period gets over, the more pressure will be on your shoulders as far as repayment is concerned. Thus, if the borrower is in a good financial state, someone who can afford to repay his loan EMIs, should try to set aside that amount or do not opt for a moratorium and continue repaying his loan. Because during this period, your interest will continue to accrue and will also get added to your outstanding amount and therefore will increase your burden. 

So, continuing repaying your loan would ensure speedy lowering of loan burden once the moratorium ends. Though moratorium will be made available to all eligible borrowers and going for it would be advisable if you are unable to pay your equated monthly installments.  However, the decision completely depends on the borrower whether the borrower wants to avail it or not. 

Also, one should get complete clarity with his lender first, how it will impact the loan before reaching a conclusion and don’t assume anything based on hearsay. It is also not clear whether borrowers will have to pay any interest on the loan at a later date for the 3 month moratorium period. In the coming times, one should wait for more clarity on the same. 

Frequently Asked Questions (FAQs)

Q.What is the exact announcement of RBI?

A.The Central bank has provided the banks with permission to allow a moratorium of three months on repayment of installments for term loans outstanding between March 1, 2020 and May 31, 2020. This is expected to help those borrowers who may find it difficult to repay their loan installments in the wake of challenges posed by the coronavirus crisis.

Q.Will I have to pay interest on the outstanding loan for three months?

A.Yes. With the moratorium in place, the banks may not ask for a penalty on missed EMIs, but continue to add interest on the outstanding loan. The RBI has clearly instructed banks, that interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period.

Q.Will the bank reschedule my EMIs?

A.Yes. The bank will reschedule your EMIs and the due amount will be added on your existing outstanding amount which you need to pay after the moratorium period.

Q.Which bank or lender can offer the three-month moratorium?

A.As per the RBI, the moratorium of three months can be offered by 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).

Q.Will my credit score be affected if the bank puts a three-month moratorium on loan repayment?

A.No.Your credit score will not be affected for three months as the rescheduling of the payments will not qualify as default as directed by RBI.

Q.Will the terms and conditions of loan agreement change?

A.No. The RBI said that moratorium will be provided only to enable the borrowers to face the economic fallout from Covid-19. Hence, it cannot be treated as a concession thus no change in terms and condition of the loan agreement.

Q.Will the bank waive interest on working capital loan for three months?

A.No. The RBI has stated that in respect of working capital facilities sanctioned in the form of cash credit/overdraft (“CC/OD”), lending institutions are permitted to defer the recovery of interest applied in respect of all such facilities during the period from March 1, 2020 up to May 31, 2020 (“deferment”). The accumulated accrued interest shall be recovered immediately after the completion of this period.

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