A loan moratorium is a period of time during which the borrower is exempt from the Reserve Bank of India's requirement that they make EMI payments on their loans. The moratorium period in a loan allows the borrower a grace period during which they can decide not to make loan EMI payments while delaying repayment of the loan. It has been frequently utilised for some sorts of credit, such as school loans to borrowers who require a specific grace time before they can start repaying the loan, aside from the Moratorium on Loan, which was recently issued as a relief post-COVID-19 epidemic.
What Happens During a Moratorium Period?
A moratorium period often begins as soon as a loan is granted. The main reason for the extension is to give the borrower more time to arrange their finances and get ready to pay back the loan. The middle stage of a loan also involves a moratorium period, during which the lender authorises the borrower to stop paying payments for a certain cause, like prolonged financial difficulties. It should be kept in mind that during the moratorium, the loan's interest usually increases.
Guidelines and RBI Circular for the Moratorium Period
In order to comprehend the general rules, let's look at the norms issued in March 2020, which are dynamic to the situations they are announced in:
In order to provide assistance to those impacted by the coronavirus outbreak, the Reserve Bank of India (RBI) issued a three-month moratorium on loan repayments by people and enterprises. Following that, it was prolonged until August 31, 2020.
Borrowers were exempt from making any term loan payments during the moratorium, which began on March 1, 2020, for a period of three months.
For the repayment of all loans, including credit cards, the RBI further encouraged banks to grant a grace period of 60 days.
The choice was made to help those who might experience difficulty paying back their debts as a result of the pandemic.
The load on the banking industry was also anticipated to be lessened by it.
The RBI also requested that banks offer loan restructuring options to borrowers who were unable to make payments on their loans because of a loss of employment, a failure of a business, a death, or other circumstances brought on by the coronavirus pandemic.
This required either extending the loan's maturity date or lowering the interest rate.
Eligibility of Loan Moratorium Period
When the COVID-19 hit, the RBI declared that opting for the moratorium was entirely up to you and that anyone with an outstanding loan and EMIs due between March 1 and August 31 of that same year would be qualified to use it.
When the RBI or banks declare a moratorium, they meticulously set up clear restrictions and eligibility requirements, mentioning the specifics regarding who is qualified to take advantage of the moratorium.
Every time a moratorium due to economic hardship is issued, the eligibility requirements are dynamic and altered.
Borrowers may be eligible for a moratorium and the RBI may impose one in the event of a natural disaster, an economic calamity, a war, or even terrorist acts.
A moratorium is neither a requirement of the banks nor a customer's entitlement. Whether to grant a moratorium or not is entirely up to the lender's decision.
Benefits of a Loan's Moratorium Period
The following are some of the main benefits to which a borrower is entitled if they decide to accept the moratorium.
1. An Improved Repayment Plan
A borrower might create a stress-free repayment schedule with the help of a moratorium on a loan. As opposed to using assets to pay back the loan, it can help them gather money from a variety of sources and start payments gradually.
2. Offers Assistance in Financial Crises
The COVID-19 epidemic has acted as a grim reminder of the pandemic's effects on the world economy. Due to job losses, wage reductions, and the death of loved ones, many people have had all of their savings destroyed. Because of this, in addition to the emotional toll of losing a loved one, many people experienced financial hardship. In this situation, a loan moratorium was advantageous because it assisted millions of people in avoiding a financial crisis.
3. There will be no harm to your credit score
A loan moratorium's lack of a detrimental effect on your credit score is one of its most significant benefits. Simply said, during the moratorium period, a borrower's credit score is unaffected by failing to pay off a loan in full or in regular installments. The ability to borrow money is therefore unaffected by a moratorium.
Problems with the Loan's Moratorium Period
1. The loan's duration is automatically
Lengthened when the moratorium period is in effect. Your long-term financial objectives may be impacted, as well as your investing strategies.
2. No Interest Waiver
The fact that repayment is not waived but only delayed is one of the loan moratorium's biggest drawbacks. This proves that, as a borrower, you have interest obligations to your bank or lender. Additionally, increasing interest rates brought on by moratoria can make your future payments more difficult.
3. Acute Burden
While a temporary break from debt repayment could offer some respite in the short term, the interest owing will still eventually catch up with you. If you haven't made any advance preparations, the sudden pressure of hefty payments could derail your monthly budget and affect your financial flow.
Lending Products with a Moratorium
Housing Loan
Home loans can have fixed or flexible payment terms and interest rates and are given for the purpose of buying a house or flat.
A period of time when your lender does not request any repayments from you is referred to as a moratorium period. The lender will recognise the borrower's current financial status and give them a few months to straighten things out and get their life back on track, even if they are short on funds or having financial difficulties during this time. Once they have everything in order, they can start quickly repaying their loan by clearing the EMIs. Banks may offer a moratorium period to borrowers who are experiencing financial difficulty in order to prevent them from skipping any EMIs or running away without repaying the loan.
Student Loan
Student loans are loans obtained in order to pursue higher education. Because a student or a student's parent or guardian applies, the student would not have the money available to repay the loan at that time. The loan can therefore be repaid once the student has finished the course and has started to earn money from their work. The moratorium period is the period of time between loan payments when the borrower is not required to make any. Depending on the loan amount obtained, several student loan moratoria may apply.
Conclusion
In times of financial difficulty, a moratorium loan can provide temporary relief from loan repayment. Although it temporarily suspends EMI payments and helps borrowers who are having trouble making their payments, a moratorium loan is completely discretionary and not required for all borrowers.
Borrowers must keep in mind, however, that requesting a moratorium does not entitle them to any respite from paying interest during that time. Therefore, if you have enough money to pay the EMIs on time, it is better to avoid a moratorium.
