June 25, 2020
The global pandemic has curtailed the income of individuals and companies. People are losing jobs and those who have availed loans for running personal and business needs are going through a difficult phase in terms of repayments. While the cash flow problems were in the pursuit, RBI came up with loan moratorium offers as a relaxation for the distressed proportion of the Indian society.
Extension of moratorium on loan instalments has been a major break for those who are facing financial crisis due to reduction in their income or no income at all. This additional time provided by RBI is indeed a much needed regulatory relaxation for the public.
A number of organizations are running their operations on huge amount of bank loans. This crash crunch due to the global pandemic is very intimidating for these companies. However the moratorium offers proposed by RBI is the survival time that these companies got as loophole to escape from the harsh conditions.
Let us first understand this: What is moratorium? Moratorium period on loan is the specific time period for which no EMI is to be paid by those who availed loan from RBI recognized institutions. This specific period is termed is EMI holiday.
It was on March 27, 2020 that RBI first announced the allowance of a moratorium of 3 months on repayment of term loans taken from banks and Housing of Financial Companies (HFCs) outstanding on March 1, 2020. An allowance of further 3 month moratorium was announced by RBI on May 22 i.e. from June 1, 2020 to August 31, 2020 outstanding on March 31, 2020.
The decision is purely under the discretion of the borrower. It is better that borrowers do not opt for moratorium if they have enough cash flows. If your income has been affected due to job loss or pay cuts, then it will perfectly fine to choose the moratorium.
If you have submitted Standing Instruction (SI) to the banks from which you have availed loan, then EMI will continue to get debited from your account unless intimated otherwise to the bank. If you are choosing for moratorium for 3 months on your EMIs, then you will have to mail the bank indicating the same.
The result of availing loan extension will be different for different types of borrowers. If a borrower is in the first year of the loan tenure opts for moratorium, there will be significant extension of the interest pay out and tenure of the loan. The additional interest for 6 months will have to be paid by the borrower on a higher base. For those borrowers who availed the loan some years ago and have been repaying considerably, the interest rate will be relatively smaller and there will be smaller extension on the EMI tenure.
There have been questions raised by the bank loan borrowers regarding whether choosing moratorium will affect their credit score. RBI has assured that the non-payment of EMI between March 1, 2020 and May 31, 2020 will in no way affect your credit score. Banks will not submit any reports regarding such defaults to the credit bureau for these months prescribed by RBI when moratorium is applied on availed loans.
There will be remarkable asset-quality challenges for at least next two years for Indian banks in spite of all the regulatory measures taken. Also, it is speculated that Non-Performing Assets (NPA) could rise to approximately 200-600 basis points, depending on the stress level and individual risk exposures of banks.