A moratorium is a temporary suspension of an activity or law until future consideration warrants lifting the suspension, such as if and when the issues that led to moratorium have been resolved
Moratorium are often imposed in response to temporary financial hardships
Purpose of Moratorium
It is to remove the pressure created by an outflow of assets so as to make it possible to find out whether an institution is still financially healthy enough to resume operations – if necessary with third-party assistance
Moratorium period
It is a time during the loan term whether the borrower is not required to make any repayment
It is a waiting period before which repayment by way of EMIs begins
Normally, the repayment begins after the loan is disbursed and payments have to be made each month
Example of moratorium
It is an authorized delay in an activity or obligation
An example of a moratorium is a deferment on the paybacks of loans
A suspension of an ongoing or planned activity
Interest during moratorium period
During the moratorium, borrower paid interest on the interest or compound interest
Under the plan, ex-gratia payment will be provided to eligible borrowers to make up for the difference between simple and compound interest paid during RBIs moratorium period
Paying of moratorium amount
1) one time payment. If the finances allow, the borrowers can make one-time repayment of the amount and then continue the loan as usual
2) increase EMI for remaining months
3) extend loan tenure
4) restructuring of loans
Experts say borrowers should not go for the relief if they are not facing financial stress
The moratorium is only a deferral for a few months, not a waiver
Banks will charge interest on the unpaid amount
Go for it only if you are unable to pay the EMI
Cancellation of moratorium
Yes, moratorium applied on a loan amount can be cancelled
Cancellation will be applicable to future EMIs and cannot be cancelled for the months already passed by
Refusal of moratorium by banks
All borrowers are eligible to seek a moratorium
Further, the court said that when multiple banks are involved in a loan transaction, one bank cannot deny extension of moratorium facility, when another or other banks are willing to do so
Impact of moratorium on banks
A moratorium does not really affect the profitability of a bank, but it may impact their cashflow
This in turn is due to the change in financing terms and because of this change, there could be a one-off loss for banks
This is obviously not favourable to any lender
Benefits of loan moratorium
1) it help in reducing financial stress, especially during the coronavirus outbreak
2) it gives the borrowers breathing space amid tight liquidity conditions
3) it thus offers respite as you can divert your funds for essential needs
4) by availing moratorium, your credit score will not be affected and you will not be reported as defaulter
5) not paying your loan will not impact your credit score and credit history
6) it will be beneficial for your future loans
7) bank will not charge any penalty even if are not replying the lians
Drawbacks of Loan moratorium
1) it is not a waiver
2) you have to pay EMIs later
3) interest will continue to accrue the outstanding amount which will lead to an increase in monthly installment or tenure of the loan
4) you have to make provisions of amount accordingly
5) loan tenure could increase
6) you have to pay a higher interest during the Lian period, if you avail Lian moratorium facility
7) if you defer two EMIs, you loan may further get extended by 6-10 months
8) comparing the current interest amount, the interest payable on the loan will be higher and have tax implications as well
Request of loan moratorium
You need to place a request before 26th of the month, prior to month in which EMI will be getting debited from your bank account
