All you wanted to know about moratorium period

With the country being in lockdown to contain the spread of Covid-19, the Reserve Bank of India had announced a slew of measures last week, to tide over the economic fallouts. Among other measures, one measure that has brought a lot of cheer is the RBI allowing banks to grant a three months moratorium to their borrowers for term loans outstanding as on March 1, 2020.

A moratorium period, the technical term for a repayment holiday, is basically a length of time during which a borrower gets time-off from his or her loan repayments. That is, you as a borrower need not start paying your instalments or interest dues if you are granted a moratorium. As per RBI’s announcement, borrowers stand to get a repayment holiday from loan dues for three months from March 1 to May 31, 2020. The RBI has allowed banks and other lenders to decide how they will structure this deferment. This includes all kinds of loans including personal and credit card dues.

Moratorium period effectively allows a borrower to postpone repayment of liabilities and help in planning his/her finances better. As a practice, banks and other financial institutions offer moratoriums to students taking education loans. As there might be a time lag between students completing their studies and getting a job, student loans usually a built-in provision for repayment holiday.

Similarly, some lenders offer moratoriums on home loans as well. For instance, SBI’s flexi home loan allows customer to pay only interest in the initial 3-5 years, after which flexible EMI payments begin. But in the current situation, banks are allowed to offer moratoriums on all kinds of loans for three months, without any such delay or default counting as a default or bad loan. Similarly, if you are running a business, in respect of working capital facilities, lending institutions are permitted to defer the recovery of interest applied (cash credit/overdraft) for this moratorium period.

While such repayment holidays are offered to give relief to the borrower, they come with a downside as well. Let’s consider the case of the current moratorium. While borrowers are not required to pay EMIs or interest till the end of moratorium period, the interest will continue to accrue on their loan amounts. Effectively, folks who avail of the moratorium will end up paying extra interest to the bank.

If you are among the individuals whose income has taken a hit due to the virus outbreak and the impact of the lockdown, then the moratorium may be a godsend. Your non-payment of interest or principal amounts during these three months will not be considered as a defaults and will not affect your CIBIL score. However, the interest accrued during this period can come back to pinch your pocket when the moratorium ends. The interest can be particularly high for personal loans and credit cards.

Consider a loan of ₹5 lakh at an interest of 12 per cent per annum for a tenure of five years. Over the five-year term, the EMI on this loan works out to ₹11,122 and the interest payable works out to ₹1.67 lakh, taking your total dues to ₹6.67 lakh. But if you avail of a three-month moratorium, your EMI rises to ₹11,459 and you end up paying ₹6.87 lakh to the bank, after accounting for the longer tenure due to the moratorium period. However, borrowers need to check with their bank on the exact interest calculation and other terms and conditions.

Moratorium is only a reprieve and not a waiver. Ultimately, you’ve got to foot the bill.

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