RBI Moratorium and It's Future After 31st August 2020

COVID-19 has had a severe impact on the world economy. And India has not been spared either. About 5 million jobs were lost in the country in July amidst the coronavirus pandemic. The government announced a list of measures to help the common man od the country. Among many measures, the much talked about one has been the moratorium announced by Finance Minister, Nirmala Sitharaman on March 27, 2020.The main purpose was to reduce the burden of borrowers by putting a temporary suspension of repayment. It was initially agreed to continue the moratorium from March 2020-May 2020, but at a conference held on May 22, 2020, the moratorium was extended till 31st August 2020. With August 31st coming close, borrowers are busy finding out the possible options in case the moratorium is not extended further.

As per the terms laid down by the Reserve Bank of India, the borrowers of standard, short-term as well as long-term loans were given a deferral of repayment. If the borrower opted for the moratorium, they would not need to repay the loan’s principal amount in these months, but the interest on such loans would still be charged and have to be paid by the borrower.Thus, a moratorium is in no way a compulsory financial binding. All loans, except those marked as ‘bad’ on March 1, 2020, could avail of this feature. It is important to note that the loan repayment was a deferral which means that the whole amount, including the accrued interest during the period, has to be paid by the borrower after the moratorium period is over.With the occurrence of the pandemic, many countries have opted for various kinds of policies and strategies to reduce the financial burden of the public as well as the economic cycle. But the situation has been very tight for India as the financial crisis was already at its peak when the pandemic hit the country.

The lending institutions and banking sector faced a tough time even before COVID entered the country. There was already a tune of bad loans amounting to Rs 9 lakh crore, and the number will go up once the moratorium period is lifted.It is estimated that a huge surge in bad loans might be seen in the future due to the current scene of unemployment and a fallen global economy. But the good news is that loans under moratorium have seen a decline as several people have not availed of the facility. This can be accounted for by the ‘interest on interest’ policy which puts the lender on a better income position along with improved liquidity status.Why did RBI insist on deferrals and not a waiver, you might ask. According to recent reports, it has been disclosed that a complete waiver in repayment of loans could result in a loss of almost Rs 2 lakh crores. If the banks face a lot of bad loans during the moratorium period, it could lead to a difficult lending situation in the future.

The moratorium came as a partial relief to the borrowers who were left unemployed and in a financial crunch during a nationwide lockdown. It allowed borrowers to excuse from repayment of EMI and short-term loans without affecting their credit score in any manner. However, the moratorium will not be beneficial for people with long term loans such as home loans. As the compound interest will keep adding up, the total amount will become a burden to pay at last.

1. Helps in reducing financial stress and managing your tight liquidity situation.
2. Banks will not charge a penalty even if you are unable to repay the loan.
3. Opting for moratorium does not affect your credit score.

1. It is not a waiver. This means that you will have to pay the EMIs later, which will be added to your principal amount. Thus, you will have to pay a higher amount of EMIs in the following months.
2. Either the EMI amount or the duration will increase according to the amount deferred during the period.
3. The interest accrued during the period will be added to the principal amount, which means an ‘interest on interest’ will be charged. Thus, there is an inherent cost to the moratorium.

The last statement was made on May 22nd, 2020 about the extension of moratorium till 31st August but after that, nothing has been heard from the RBI on this issue. There has been no extension of the moratorium while the economic situation has still not been stabilised. Some experts give a wild guess that the moratorium might get extended, but only for the severely affected sectors of the economy that have still not been able to start operations such as entertainment, hospitality, real estate, etc.However, it is all speculation. While you can hope that the moratorium gets extended, it is important to get prepared and take the right action proactively. Thus, it is important to consider the scenario if the moratorium is not extended.

1. One time Settlement of the Accrued Interest and Principal: For those who have the capacity to repay the loan, can consider a one-time settlement of the accrued interest and the deferred principal amount. This will ensure that the rest of the EMIs and the duration remain unchanged.
2. Refinancing of the Loan: Loan rates have reduced considerably ever since the pandemic hit our economy. You can also consider renegotiating with your existing lender or refinancing your loan to avail a better interest rate loan.

While it is difficult to say whether the moratorium would be extended or not, lending institutions, as well as borrowers, are looking for ways to curb the financial crunch, the economy is going through. Most people believe that the RBI is unlikely to extend the moratorium and everyone is awaiting the committee to come out with the modalities and principles of restructured loans and EMIs. For now, the best option for borrowers who have opted for a moratorium is to choose the right option of tackling the situation in case the moratorium is not extended.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.