As a relief measure for people in the face of the coronavirus pandemic, the Reserve Bank of India (RBI) has granted a three-month moratorium on repayment of term loans and credit cards. Credit institutions have been instructed to postpone the EMIs of their customers who opted for this moratorium. But what is a moratorium and how does it work? Let’s take a look.
A moratorium is a temporary suspension of activity until future events warrant lifting the suspension or the problems related to it have been resolved. Moratoriums are often issued in response to temporary financial hardships.
How does a moratorium work?
A moratorium is often issued in response to a crisis that disrupts the normal course of the day. An emergency moratorium on some financial activities may be granted by a government or central bank after earthquakes, floods, droughts or disease outbreaks. It will be lifted when normality returns.
What is an example of a moratorium?
Here are some examples of moratoria:
Coronavirus pandemic: The novel virus (Covid-19) outbreak, which infected more than a million people in more than 180 countries, caused several nations to lock down their cities. The highly contagious disease rocked world markets and led national economies into recession. On March 23, the Indian government imposed a lockdown across the country to fight the virus. The move led to inexplicable job losses, flight bans, train and bus connections and companies were hit. After taking stock of the situation and responding to the temporary financial distress, RBI announced on March 27, 2020 that all credit institutions, including banks and home financiers, must grant their borrowers a three-month moratorium on fixed-term loans. The moratorium related to the payment of all installments due between March 1 and May 31, 2020. The deferred installments under the moratorium would include the following payments due between this period, according to RBI:
a) capital and / or interest components;
b) any repayments due;
c) equivalent monthly payments (EMIs);
d) credit card fees.
YES bank moratorium: March 2020, the RBI imposed a 30-day moratorium on the YES Bank. Under the terms of the moratorium, deposit withdrawals by customers of the bank were limited to 50,000 rupees per person during this period.
What is a moratorium period?
A moratorium period is the time during a loan period during which the borrower does not have to make any repayment. It is a waiting period before which repayment of EMIs will resume. Usually repayment begins after the loan is paid out and payments are made monthly. However, due to the moratorium period, payment begins after some time.
Education loans provide this feature. This is because student loans are repaid after the acquisition begins. There may be delays between completing your studies and receiving a job. For this reason, a moratorium period is planned.
Advantages of loan payment within the moratorium period
If a customer has the liquidity, they shouldn’t opt for a moratorium. The repayment of the loan amount is recommended as the loan amount continues to earn interest even during the moratorium period. The repayment helps to reduce the interest costs.
FAQs on RBI’s EMI moratorium
Which lenders are allowed to offer the RBI’s EMI moratorium?
The moratorium can be extended by any commercial bank, including regional banks, rural banks, and small financial banks. It can also be offered by credit unions and non-banking financial companies (NBFCs). Any financial institution across India can offer the moratorium.
Are EMI deductions automatically deferred or does the borrower have to choose to do so?
The RBI has allowed banks to decide how they want to offer their customers the moratorium. Some banks ask you to “opt-in” for the moratorium without wanting to continue your normal repayment cycle. Some other banks have set a moratorium offer as the standard option on some products. You must therefore submit an application to “exit” the system if you want to keep your repayment cycle unchanged.
Until when can the borrower opt for the EMI moratorium offer?
Three days prior to the debiting of the loan amount.
Is this an EMI waiver?
This is not a waiver, but a postponement of EMIs in such a way that the term and the due dates of the repayment are extended by 3 months after the moratorium has expired.
Does the moratorium include both the interest and the main components of the loan?
Yes, the moratorium covers both interest and the main component of your EMI.
When does the RBI moratorium apply?
The moratorium applies to loans outstanding after March 1, 2020.
How can I opt for the RBI moratorium?
If your bank has advised you to apply to take advantage of the moratorium offer, you can visit their website or click on the link shared by your bank and fill out a form in it to opt for the scheme. You can also visit the bank to make this application. If your bank has made the moratorium the default option on the type of loan you are taking out and you do not want to take advantage of the program, you will need to visit the bank’s website and fill out a form to opt out of the program.