Macro Moves

RBI’s moratorium policy- how will it affect the borrower?

Created on 04 Apr 2020

Wraps up in 4 Min

Read by 3.4k people

Updated on 01 Oct 2020

All banks, including housing finance companies, were allowed to allow a 3-month moratorium on installments of EMI for outstanding loans on March 1, 2020. Loan Moratorium: Amid the Coronavirus outburst and its impact on the living of millions of individuals - paid and self-employed - the declaration of the Reserve Bank of India gave great relief to the term of borrowers. All commercial banks, including housing finance companies, were permitted to give a 3-month moratorium on monthly installments on all term loans which are outstanding on March 1, 2020.

How the moratorium works?

In simple terms, it means that the borrower who has taken out a residential loan from SBI or a loan from any other bank or housing finance company such as LIC Housing Finance will not be required to pay the three-month EMIs. The payment schedule and all subsequent due dates for EMIs will, therefore, be changed in three months.

This process does not mean that one will not be paying EMIs for three months at all. it is just that he/she is given a term break from EMIs. Yes one doesn't need to pay three-month EMIs together as soon as moratorium ends. The date will surely be extended. For example, if you have 12 months remaining on your loan, it will be 15 months now, with three additional months with no EMI payments for those months in particular but in those months you will pay the EMIs of these three months.

However, it is recommended to contact your banker for clarity.

Basic relief

Borrowers who have home loans, auto loans, education loans, term loans for agriculture, retail loans and crops under their names and credit card fees will also be covered.

How will this help banks?

Since all activities were stopped. This will help to avoid retail NPAs. Normally, banks have struggled with corporate NPAs, but with a national blockade, workers will find it difficult to repay their loans, significantly increasing NPAs registered with banks.

Main points to be noted:

  • According to the announcement by the governor of RBI, there is a postponement and the duration of the loan is not extended. This means that the accrued interest will have to be paid after the moratorium ends (albeit at a lower rate, as the RBI has reduced the repurchase rate and banks will pass it on to borrowers).

  • Card EMIs are included in this policy, so do not worry about paying them on due dates.

  • As the RBI announced, banks can offer a three-month moratorium and nowhere is it mentioned that this is mandatory for lending institutions. This means that borrowers will only be able to benefit from the three-month moratorium if the bank decides to pass this benefit on to borrowers.

The functioning of the moratorium 

Borrowers do not need to approach the bank or HFC to request a moratorium. This also means that there is no need to cancel any ECS or standing instructions given to banks. But, what if you are in a position to pay EMIs as and when they expire in the next 3 months? Should you also opt for a moratorium? "If one can pay the loan EMIs, try to hold back that amount even if you completely do not need to pay them during the moratorium unless it harmfully affects other pressing financial requirements. This would ensure a quick decrease of the loan burden as soon as the moratorium finishes,” says Shetty.

It should be noted that, under normal circumstances, if the loan payment is delayed, it affects the borrower's credit history and the loan's risk rating. However, as announced by the RBI governor, the three-month moratorium will not affect the borrower's credit rating and loan risk rating. If lending institutions allow a three-month moratorium on loan payments, individuals' EMI loan payments will not be deducted from their respective bank accounts until the moratorium period ends. EMI payments on the loan will resume when the three-month period expires.

To alleviate the economic problems caused by the coronavirus, the governor of the RBI, at a news conference today, announced the aforementioned reliefs. However, it should be noted that the RBI allowed all credit institutions to offer a three-month moratorium on term loans, but the implementation of the moratorium policy falls only to credit institutions. Therefore, it is advisable to consult the credit institution about the policy and how it will be offered.

Will the bank waive interest on working capital loans for three months?

About working capital facilities sanctioned in the form of credit/overdraft (“ CC / OD ”), credit institutions are authorized to postpone the recovery of interest applied to all these facilities during the period from March 1, 2020, to May 31, 2020 (“postponement”). The accrued interest will be recovered immediately after the completion of that period.

With this, we can conclude that all the businessmen who were under the short term loans to maintain and circulate their flow of working capital who were bound to pay the money in a very short time are relieved from paying it on the due date and are getting a good amount of time to pay their debts. and of course this step will somehow have a positive impact on increasing the country’s GDP in a small amount.

So I think after reading this article you have a sound idea of what RBI’s 3-month moratorium policy is. I have also covered many terms related to this topic and also reference which will be a good source of help for understanding this concept well. I am sure that after reading this article you will know the working and functioning of the policy and it will help you well in this difficult time.

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Ausaf Ahmed

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Ausaf is a 2nd-semester student who is pursuing Accountancy Honours. He has a joyful character and is a very curious boy who always tents to learn new things especially in travel and finance background. 

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