What is moratorium?
If you go by the definition of the term, a moratorium is referred as the temporary suspension of activity for a period until it gets lifted. Such a period is often imposed as a result of temporary financial issues. Also, the term is mostly used during a loan term when the borrower is not obligated to make a payment. It is a waiting period before the borrower starts making fixed monthly payments.
How does a moratorium work?
A moratorium is usually imposed as a result of financial crises that have impacted the routine functioning of an entity. It is normally seen that in the aftermath of earthquakes, floods, droughts or disease outbreaks, an emergency moratorium on some financial activities may be granted by a government or the central bank. The period gets lifted after the normalcy sets in.
By now, the term has become popular due to coronavirus pandemic.
What has happened?
The outbreak of novel virus (Covid-19) outbreak has caused massive job losses due to lockdown which was enforced in order to control the infection. The lockdown has hit the economy badly following which the RBI on March 27, 2020, said all lending institutions, including banks and housing finance companies, will have to give their borrowers a three-month moratorium on term loans.
As per the order, the moratorium was for payment of all instalments that were due between March 1 and May 31, 2020. According to the RBI, the deferred instalments under the moratorium has included the following payments during the said period:
a) principal and/or interest components;
b) bullet repayments;
c) equated monthly instalments (EMIs);
d) credit card dues.
Also, On March 5, 2020, the RBI imposed a 30-day moratorium on YES Bank. Under the terms, customer of the bank during this period could not withdraw more than Rs 50,000.
What is a moratorium period?
Typically, the repayment of any loan begins after it is being disbursed, but due to the moratorium period, the payment starts after some time. Under the moratorium period, the borrower is not required to make any repayment during a loan term.
Education loans has this feature, and also because education loans are repaid by students once they start earning. Since there is a time between completing studies and before picking up a job such a provision for moratorium period has been given.
What is the benefit of paying loan within the moratorium period?
If at all you have the capacity to pay the loan, then you can also opt out of a moratorium. Repaying the loan amount is advised as interest continues to accrue on the loan amount even during the moratorium period and repayment only reduces the interest cost.
What is RBI’s EMI moratorium?
The moratorium can be extended by any commercial bank, including regional banks, rural banks, and small finance banks. The central bank has allowed banks to decide how they want to offer the moratorium to their customers. It can also be offered by cooperative banks and non-banking financial companies (NBFCs). Any all-India financial institution can offer the moratorium.