What is a Loan Moratorium?
Loan Moratorium is introduced by central monetary authorities such as the Federal Reserve of USA for RBI in India as instruments of monetary policy to protect those who are facing financial hardships on a temporary basis due to disruptions in the larger macro-economic situation of the country Loan Moratorium is a temporary suspension of loan repayment obligations, till there are some encouraging signs in the progression graph of the world’s economy.
Loan moratorium is formulated by the Reserve Bank of India as a temporary relief measure to come to terms with the coronavirus pandemic. The RBI has found it prudent to introduce a loan moratorium period of 3 months on the following loan variants
- Term loan
- Credit card repayments
All lending institutions both public and private sectors are given guidelines to defer monthly or periodical EMIs for all the customers who have enrolled for the benefits of the moratorium scheme.
How does a loan moratorium work?
Loan moratorium is a first level of defense applied by central banking authorities to deal with a financial crisis which has the capability to disrupt the normal routine of individuals, small businesses and have a scarring effect on the nation’s economic situation. In the past, there have been many natural disasters such as floods, mighty earthquakes, long-lasting droughts and pandemic outbreaks.
Cost of Loan restructuring
Outstanding of loan
Rs 10 Lakh
After a moratorium of 1 year
Remaining payment tenure
Renewed outstanding after 1 year
Rs 10.85 lakh
8 per cent
EMI after moratorium of 1 year
Examples of Loan Moratorium
The covid-19 pandemic had a profound effort effect on the economic activities of the people. Nearly 180 countries are affected and depending on the pandemic severity, the national governments had to implement a slew of lockdown measures in their cities.
1. Initial Stages
Global markets acted unpredictably in the beginning of the pandemic due to lack of information regarding the extent and severity of the initial cases.
- On March 23rd, 2020, the Government of India after conducting a thorough analysis of the ground situation and institutional responses of foreign countries decided to impose an all-encompassing lockdown across its boundaries.
- The entire country entered into war mode to effectively combat the virus. Never before in the history of independent India, have we seen such mass disruption in the financial activities of the people.
The unpredictability and instability among financial activities have led to an economic depression. Many people had their salaries reduced and some people lost their jobs. The entire working ecosystem faced a serious reckoning due to the covid-19 pandemic and there were a lot of unreported and unaccounted job losses.
RBIs decision to introduce Loan Moratorium
The RBI responded to the SOS call of individuals who have availed term loans, house loans and who have outstanding credit card bills.
RBI immediately went into crisis mode and took stock of the situation to alleviate the financial suffering of the normal people. As such, on March 27th 2020 the RBI issued generally circular containing mandatory guidelines to all lending institutions, housing finance companies and banks and indicated to them, that borrowers should be given at 3 month loan moratorium in the category of term loans.
The moratorium was decided to be in force during the time periods of March 1st and May 31st, 2020. The RBI indicated that all deferred financial installments under the loan moratorium would comprise of the below-given payments during the indicated period
- Principal amount and components of interest
- Equated monthly installment
- Bullet repayment
- Outstanding dues on credit cards
What is a moratorium period?
- The time period during a specific term loan in which the borrower is not necessarily mandated to carry out his repayment obligations is known as a moratorium period.
- The payment of EMI resumes immediately after the said waiting period is over.
- When the loan disbursement takes place and the repayment schedule kicks in, most of the financial institutions mandate that borrower should pay EMI immediately till the repayment is complete.
What are the various advantages of servicing loans during the loan moratorium period?
For those customers who are cash surplus and do not have liquidity issues, it is financially prudent advise for them to pay their loan settlement during the moratorium period. Loan repayment during the RBI moratorium period and shows that interest is not applied to the total solute total principal at the end of the moratorium period full stop repayment period repayment during RBL loan market for the borrower can be less amount of interest and avoid any charging of extra fees.
How borrowers can improve their financial position by availing the benefits of RBI second loan moratorium during covid-19?
Higher costs are accrued on the financial history of the borrower through interest charges and penalties in case of repayment defaults. This series of steps has a negative impact on the credit history of the borrower and a shadow is cast on the future creditworthiness of the borrower and which may result in the non-sanction of loans in the business and housing sector. To prevent the tarnishing of the credit history of the borrower, the RBI has introduced the loan moratorium scheme.
- Individual borrowers are facing a host of difficulties such as income-expenditure mismatches and monthly defaults.
- The RBI has entered the picture and to stem the trickling of future financial creditworthiness, the RBI has asked all financial lenders to initiate a second moratorium.
- The good news is that those who did not avail of the first loan moratorium can also offer this second one. Those who have availed of the first moratorium period can also extend the repayment of the loan for another period of 3 months for the second moratorium.
With the intent to protect the integrity of the financial systems and its linkages, the RBI announced the introduction of the second loan moratorium during an unscheduled announcement so that nobody would take advantage of internal trading.
Effect on Small Businesses and MSMEs
Small businesses, individuals and MSMEs whose total exposure in a term loan or a housing loan goes up to a maximum of Rs 25 crores can avail the second loan moratorium.
it is also indicated that the specific loan should not have undergone any banking restructuring framework. Only those loans that come under the classification of standard loans without the incidence of any NPA classification are eligible for a moratorium as of March 31st, 2021. Let’s glance through how this second loan moratorium will work to the advantage of the various borrowers and small businesses
Borrowers who did not opt-in for the earlier moratorium
Borrowers were given an extended loan moratorium period of two years to overcome the extraordinary negative circumstances created by the national lockdown in light of the covid-19 pandemic. But this loan scheme did not evince interest from many individual borrowers. Now the same persons are facing financial difficulties in loan repayments.
- Repayment defaults not only increase the monetary value of interest and leads to the charging of single lump sum penalties, but they also have a long-term impact on the credit history.
- The creditworthiness of an individual is paramount to ensure that they get proper credit in their future needs. Loan moratorium schemes are amazing instruments that ensure borrowers do not spoil their credit history.
- Skipping the payments during the loan moratorium scheme now does not attract any negative report or any hard pull on the credit history of the borrower.
RBIs loan moratorium is not only concerned with the short-term advantages of maintaining financial solvency to the borrower but it deals with the long-term consequences of maintaining a good credit ecosystem in the minds of the borrower.
Restructured loans and Loan Moratorium
Entrepreneurs take term loans to make the economic wheels of the country move. Disastrous situations like the pandemic or the covid-19 should not be allowed to create disruption in the financial discipline of the entrepreneurs.
To prevent the small organizations from getting discouraged from fulfilling their debt obligations, the RBI loan moratorium scheme provides financial help in times of need so that their belief in the financial system is strengthened and they continued to make disciplined financial payments after the loan moratorium scheme ends.
What are the options available to those who have already availed the loan moratorium?
- The first loan moratorium introduced by the RBI was for the duration of 3 months. The central bank later extended the same scheme by another three months up to August 31st, 2020.
- The RBI has also indicated that as part of the restructuring framework, interested term loan borrowers can seek to extend the loan moratorium to a period of 2 years after detailed consultations with the financial lender.
- The good news is that even if any individual or business organization availed that advantage of the first moratorium in 2020, they are still categorized as eligible to reap the benefits of the new loan moratorium scheme in 2021 and extend their repayment tenure by another two years.
- Lending institutions are now authorized to use this loan moratorium window to permit certain modifications that they see fit in enhancing the moratorium period.
What are the prime benefits of RBI Loan moratorium?
- Reduction in financial stress for those who are facing shortfalls in income flows due to the extenuated circumstances of the covid-19 crisis.
- Availing the loan moratorium safeguards the financial reputation of your credit score and does not have a long term negative effect.
- Banks are precluded from charging any financial penalty for availing moratorium
Few drawbacks of availing RBI loan moratorium
- Payment of EMI has to be done at a later period of time. The total quantum of the interest is assimilated into the principal amount thus making it a huge financial burden at the end of the moratorium period for paying a higher amount of EMI.
- Tax implications certainly exist in availing for RBI loan moratorium. The tax deductions that are calculated on the latest serviced interest will definitely be altered by availing the moratorium. –
- Read More – Moratorium Calculator
- By availing the RBI loan moratorium the borrower will inadvertently extend their term loan schedule by a minimum of six months and to a maximum of 10 months.
Eligibility for the latest RBI loan moratorium
- Those businesses and housing loan borrows who did not undergo restructuring are eligible to get a 2 year extended loan moratorium.
- This is applicable to small businesses, SMEs and individuals who have availed of term loan for business or personal nature.
- The loan moratorium facility is applicable to all those borrowers you have a maximum exposure limit of Rs 25 crores.
- Those were seeking fresh loans are eligible for up to a maximum of three years applied at a repo rate as on March 31st 2022.
Credit injection after Loan moratorium
It was also announced by RBI that a complimentary financial mechanism of injecting Rs 50,000 crores into the credit system is being carried out at the earliest. This cash injection offers a diverse range of benefits to manufacturers of:
- Complex medical devices
- Importers of vaccines
- Pathology labs
- Primary dispensaries and super-specialty hospitals
The RBI has also encouraged the medical establishments to procure ventilators and also facilitate the manufacture of ventilators in India, manufacture of related drugs and establishment of logistics for the smooth flow of medical infrastructure.
RBI Loan Moratorium News FAQs:
1. Which category of lenders is permitted to offer the EMI loan moratorium of RBI?
2. Should I make a formal application for loan moratorium or will they be automatically deferred by the financial system?
3. Is loan waiver equivalent to waiver of EMIs?
4. Till which time can borrowers opt for the RBI loan moratorium offer?
5. Are both the term loan and the interest amount included in the RBL loan moratorium?
6. How can borrowers avail for the RBI loan moratorium?
7. What if the borrowers are facing financial difficulties even after the three month RBI loan moratorium?
8. Is interest on the term loan and on credit card outstanding balance applied during the RBI loan moratorium period?
9. What is the last day before I can apply for a loan moratorium?
10. Should individual borrowers apply for a RBI loan moratorium?
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