Overview:

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At the onset of the global pandemic, the RBI announced loan moratoriums in order to afford relief to the loan borrowers initially for a three-month period, which was later extended to three more months, starting from March to August 2020. The initiative was taken as an effort towards reducing the strain on the banking industry on one side and to offer immediate relief to the borrowers facing the inability to repay loans due to the economic slowdown induced by the pandemic.

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Loan Moratorium—How does it work?

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A moratorium period on a loan is a particular period when the concerned bank or financial institution releases the borrower temporarily from the obligation to make EMI payments for their loans either at the request of the borrower or as per the directions of the Reserve Bank of India. On such a request, borrowers having difficulty paying loan EMIs could seek a loan moratorium as soon as it is disbursed by the lending institution (also called an EMI holiday) and could start making payments after such a break.

The moratorium period delivers a breathing space for the borrowers, allowing them to stabilize their finances without any imminent stress to pay loan EMIs during crucial life events like purchasing a house property or fulfilling an education. However, it is necessary to understand that the interest pending through the moratorium period increases throughout it.

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Calculation of the Loan Moratorium Period

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Loan moratorium could be calculated through this formula:

Interest = balance * (1 + r) ^ i - balance

where:

balance: opening balance at the commencement of the moratorium period;

r – Rate of interest (monthly);

Number of moratorium periods

For instance, if Mr. takes a loan at a monthly EMI payment of Rs. 7,000 but, due to certain financial conditions, he is unable to pay the monthly EMIs, he could request the concerned bank to avail of a moratorium on the loan. The bank decides to give a moratorium period of six months during which the person will be relieved from the EMI payments; instead, the loan tenure will increase by six months.

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Who is eligible to avail loan moratorium? 

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The eligibility to avail moratorium on loans depends on the factors stated below-

Loan Category- Long term loans such as Home Loans, Education Loans, Personal Loans and Business Loans, etc. are generally qualified to avail moratoriums as per RBI directions. 

Repayment History: Borrowers who are consistent with their monthly loan repayments have greater chances of approval of loan moratorium.

Genuine Reason for Seeking Moratorium: A borrower seeking a loan moratorium should have a genuine reason for seeking and shall convince the lender regarding the financial strain and intention of repayment after the end of the moratorium period.

Other than those mentioned above, certain home loans should also have a provision for moratorium periods due to their large amounts, and the borrowers may require a longer moratorium to be financially stable enough to begin repayment again.

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Loan Moratorium Benefits

Better Approach for Repayment

Since availing of a loan moratorium offers financial relief to the borrower and also convinces the lender institution of repayment on a later date, it is a healthier approach towards repayment in a systematic manner than the long-drawn legal processes of dilution of assets.

Offers immediate relief

During unfortunate events like loss of employment or medical emergence, availing of loan moratoriums could offer necessary relief to reassign finances where they are immediately required.

No adverse impact on credit score

The key advantage of a loan moratorium is that it doesn’t create any adverse impact on the credit score of the borrower during the temporary relief period and no effect on his capacity to borrow.

No Penalty Charges

Approval of loan moratorium relieves the borrower from any penalty charges or late payment fees, which would otherwise be levied on the borrower.

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Loan moratorium Disadvantages

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No waiver in interest payments

The key disadvantage of a loan moratorium is that when the borrower has availed it, it doesn't actually mean waiver of interest payments but only deferral. In other words, there is no reduction in the loan obligation, and the borrower still owes interest to your bank or your lender. Sadly, loan moratoriums could sometimes also lead to additional interest charges, triggering more pressure on future payments.

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Extension in the total loan period

A prevailing loan moratorium or EMI break implies a longer loan period. For instance, a borrower who gets a loan moratorium on a loan period of five years will have the repayment period extended to seven years. Hence, doing so could affect the long-term financial plans and the financial stability of the borrower.

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Undue strain on the borrower

Getting temporary relief against EMI payments might feel good for a short period, but at the end of the moratorium period, it would be extended, which is likely to put an unanticipated strain on the finances of the borrower and lead to cash flow issues.

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Likelihood of Mismanaged Funds

The temporary reprieve from the moratorium could have the likelihood of fund mismanagement if there is a lack of discipline in financial planning. During the moratorium period, the relieved EMI funds could be expended towards non-essential items, which will lead to limited resources at the end of the moratorium period.

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How can a borrower avail loan moratorium period in his loan?

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The decision to either seek a loan moratorium or not should include a clear evaluation of the financial status of the borrower along with his/her future financial goals. Before reaching any final decision, carefully weigh the pros and cons of availing of a loan moratorium.

As the terms and conditions of each loan might vary across lenders, and to avoid confusion, choose a lender carefully who could offer a good break during the initial years of loan tenure. Once the decision on the lender is made, talk to them regarding their needs and clarify all other charges, procedures, and advances to ensure easy repayment terms during the entire tenure, even after the term break. Follow the steps provided below:

1. Decide whether you really need it considering the long-term burden it will create on the payable interest on the loan amount.
2. Find out if the loan agreement entered between the lender and borrower comprises a provision for loan moratorium.
3. If the answer is yes, then go to your lender and discuss about your financial status including your commitment to repay the EMIs after the break. 

It is to be noted that the moratorium period offered by each lending institution might be different, and borrowers should compare these terms to ensure that they provide clear and transparent terms throughout the loan period, apart from the EMI break.

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Conclusion

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A loan moratorium not only relieves the borrower from the payment obligations for a certain period but also assures the lending institution that the borrower will service debt obligations till the conclusion of the period. Borrowers should keep in mind that applying a moratorium does not provide any relief for interest payment after the moratorium, and people with sufficient resources should avoid a moratorium. The decision of availing a moratorium on loans is optional for borrowers, and the decision should be made with a stern commitment to fulfilling repayments with strict discipline at the conclusion of the moratorium.