What 3 month moratorium on repayment of term loans means for borrowers
The Economic Times 30/03/2020
Prima facie, the three-month moratorium on repayment of term loans by borrowers means that they would not have to pay the loan EMI instalments during the moratorium period. Going by the RBI statement, availing such a moratorium would also not lead to a down grading of the borrower's credit rating or affect the risk classification of the loan. Further, availing the moratorium will not entail any change in the existing terms and conditions of the loan. If the existing terms and conditions of the loan contain conditions/charges related to a moratorium then these may apply depending on the moratorium policy adopted by the lending institution. As per the RBI, repayment of credit card dues can also be deferred under the moratorium mechanism.
Under normal circumstances if loan repayment is deferred then the borrower's credit history and risk classification of the loan can be adversely impacted. However, in case of this moratorium the borrower's credit rating will not be impacted in any way, as per the RBI statement.
The RBI in a circular issued later clarified the following: Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period. Deferred instalments under the moratorium will include the following payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly instalments; (iv) credit card dues.
The Reserve Bank of India (RBI) today in a press conference announced that all banks and NBFCs have been permitted to allow a moratorium of 3 months on repayment of term loans outstanding on March 1, 2020.
The above interpretation is based on the RBI's intention as spelt out in the statement today. However, actual conditions of moratorium may vary depending on how different banks implement it. It is also not clear whether borrowers will have to pay any interest on the loan at a later date for the 3 month moratorium period. Normally, simple interest is payable on a loan during a moratorium period.
The RBI in its statement said, "All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all -India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) ("lending institutions") are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months. "
A moratorium of this nature would normally imply that individuals' EMI repayments of loans taken would not be deducted from their bank accounts till the moratorium period is over. The loan EMI payments will restart only once the moratorium time period of 3 months expires.
Gaurav Gupta, CEO & Founder, MyLoancare.in says, "In a significant relief to borrowers, RBI has allowed banks to give a three months moratorium for all term loan repayments without negatively impacting the asset book of the banks and credit score of the borrowers. As a result of the moratorium, tenure of such loans will get extended by 3 months which should be possible as floating rate loan contracts typically have a provision for extension of loan tenure. Customers will also pay additional interest of 3 months on their current outstanding loan amount. Whether the customers will have to pay this additional interest in one go or will be allowed to get it adjusted as additional EMI is something that needs to be clarified by banks."
The Central bank governor further said, "The moratorium/deferment is being provided specifically to enable the borrowers to tide over the economic fallout from COVID-19. Hence, the same will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade. The lending institutions may accordingly put in place a Board approved policy in this regard."
Speaking to ET Now, SBI chairman Rajnish Kumar said, "With regards to the moratorium period, across the board, all term loan EMIs (including those taken for loans against property) will get shifted by three months automatically."
The RBI statement, issued later, says: "The rescheduling of payments will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. CICs shall ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries."
Adhil Shetty, CEO, BankBazaar.com says, "If you can afford to repay your loan EMIs, you should try to set aside that amount even if you’re not required to pay them during the moratorium unless doing so will adversely impact other pressing financial requirements. This would ensure speedy lowering of loan burden once the moratorium ends. Most importantly, get complete clarity with your lender how it will impact your loan before reaching a conclusion and don’t assume anything based on hearsay. Non-payment of loan EMIs during the moratorium will not impact your credit score, as mentioned by the RBI governor. As such, you should stay on top of it by checking your credit score regularly during the moratorium period."
This announcement by the central bank comes in the wake of the finance ministry writing to the bank suggesting a moratorium on EMI, interest and loan repayments for few months, as per an earlier Economic Times report.
There have been requests from various stakeholders to defer the EMI payments as the country is going through a 21-day lockdown due to spread of COVID-19.
This will provide relief to many individuals, especially the self-employed, as they would have found it difficult to service their loans such as car loans, home loans etc due to loss of income during the lockdown period. If they had missed any EMI payment they were risking adverse action by banks which could have hit their credit score.
As per Reserve Bank of India (RBI) rules, any default payments have to be recognised within 30 days and these accounts are to be classified as special mention accounts.
It is to be noted that RBI has allowed all lending institutions mentioned above to offer a 3 month moratorium on term loans but the banks have to get an approval from their respective boards to implement the moratorium policy. Therefore decision on offering a moratorium is actually up to the lending institution. Therefore borrowers should get clarity from their lending institutions on how this moratorium, when and if offered, will work for them.
The circular issued later by the RBI further clarified: "Lending institutions shall frame Board approved polices for providing the above mentioned reliefs to all eligible borrowers. Wherever the exposure of a lending institution to a borrower is Rs 5 crore or above as on March 1, 2020, the bank shall develop an MIS on the reliefs provided to its borrowers which shall inter alia include borrower-wise and credit-facility wise information regarding the nature and amount of relief granted. The instructions in this circular come into force with immediate effect. The Board of Directors and the key management personnel of the lending institutions shall ensure that the above instructions are properly communicated down the line in their respective organisations, and clear instructions are issued to their staff regarding their implementation."
What does moratorium on loan mean?
Moratorium period refers to the period of time during which you do not have to pay an EMI on the loan taken. This period is also known as EMI holiday. Usually, such breaks are offered to help individuals facing temporary financial difficulties to plan their finances