The COVID-19 outbreak had disrupted the Indian economy. Many people had lost jobs or faced a significant loss of income. Therefore, RBI came up with an EMI moratorium for borrowers who have taken up big-ticket loans like a home loan. All the leading banks in India had to offer monetary relief to the borrowers. But that was not enough, the second wave of the pandemic was more severe and deadly than the first one. Hence, RBI gave a moratorium extension to borrowers.
A moratorium is a temporary ceasing or deferring of an activity by an official agreement. RBI Moratorium on home loans means one is not classified as a ‘defaulter’ if he is not able to pay home EMIs during the moratorium period.
Hence, in the wake of the second pandemic, on 5th May 2021, the RBI governor announced a moratorium extension, also called Moratorium 2.0. Hence, the eligible borrowers who did not use their first loan moratorium can avail of the second one. Moreover, whoever opted for the moratorium earlier can get their moratorium period extended.
Moratorium extension applies to:
- Firstly, individuals, MSMEs, and small business borrowers having an aggregate loan exposure of up to 25 crores.
- Secondly, borrowers who have not opted for debt restructuring under any earlier framework. But if the person has availed of restructuring under the first framework, he can get a moratorium extension for a total of two years. Moreover, the lending institutions should agree to modify the plans.
- Lastly, borrowers must be classified as ‘Standard’ as of 31st March 2021. A person loses the Standard tag if the loan repayment is not made within 90 days or more. Moreover, after 90 days of default, the loans are classified as ‘Substandard loans’.
Any default leads to higher interest costs and penalties. It also impacts the credit history and future creditworthiness of an individual.
Moratorium 1.0 allowed borrowers to avail of the moratorium for three months from 1st March to 31st May 2020. Further, it was extended to 31st August 2020. Later, it was allowed as a part of restructuring where loan moratorium extension was allowed for two years with consultation with the lender.
If a borrower has opted for the moratorium in 2020, then a moratorium extension is applicable for a total period of two years, including the period utilized in the earlier resolution framework.
Important things about Moratorium Extension
Borrowers who restricted loans under the first resolution in 2020 can avail of moratorium extension if there is scope. But if a person is opting for a moratorium extension after receiving restructuring 1.0, then the total tenure of the moratorium is two years, including the earlier period. For instance, if a person received a moratorium for six months in the first period, then he can get a moratorium extension under the second resolution for one and half years. Moreover, the person needs to pay regular repayments till 31st March 2021 to receive a moratorium extension.
Also, the new restructuring plan will impact the credit history and scores of the borrower. Even though the borrowers won’t be classified as defaulters but their credit score gets impacted. The lending institutions will report them to credit information agencies, and they will tag them as ‘account restructures under COVID-19’. The credit scores after restructuring will remain less than a standard account without arrears but more than a standard account with NPA.
Loans eligible under Moratorium Extension
All retail loans are eligible for restructuring like home loans, personal loans, car loans, education loans, gold loans, etc. However, credit facilities provided to employees by lending institutions are not eligible for resolution under 2.0.
Options under Restructuring Framework 2.0
During the restructuring, one can opt for various options like a complete holiday of any principal or interest repayment up to the moratorium period of two years. Moreover, one can also pay part interest during the moratorium period. Once the moratorium period ends, one can pay higher EMIs during the original tenure of the loan. Additionally, one can apply for an extension of original tenure to repay the loans after the moratorium period.
Alternatively, even if there is no moratorium, one can go for the original tenure extension which a good number of eligible borrowers opt for.
For example, an EMI moratorium on a five-lakh outstanding loan
|Remaining tenure||10 years||10 years|
|Moratorium period||2 years||2 years|
|Outstanding principal after the moratorium||6,10,000||6,10,000|
|Original tenure extension||No||2 years|
|Hence, remaining tenure after the moratorium||3 years||5 years|
|Therefore, revised EMI||19,689||12,965|
|Hence, total Additional Interest||71,403||1,40,480|
Moratorium Extension or any extension means higher interest outgo
Moratorium on EMI or interest payments or extension of original tenure results in higher tax outflow. A lesser or no repayments of principal amount during moratorium or extension period will lead to higher outstanding. Hence, one needs to pay more interest on the higher outstanding EMI or loan.
To reduce the additional payment of interest, one can pay off the interest during the moratorium and restructure the loan in such a manner that the interest gets paid within the original tenure. For example, if there is an original tenure extension for one year the additional interest is ₹1,40,480. But if one starts to pay the interest after the moratorium period ends, the additional interest becomes ₹71,403.
Who all are eligible to provide a moratorium?
All lending institutions can provide moratoriums including:
- Firstly, commercial banks
- Secondly, public sector banks and private sector banks
- Further, district, state and urban co-operative banks
- Then, foreign banks
- Moreover, regional rural banks
- Housing finance companies
- Lastly, non-banking financial institutions
To sum up, the moratorium extension was all about postponement in the instalments for two years, as a restructuring plan. Also, it has some drawbacks in terms of higher interest payments and impairment of credit score. Hence, one should do a thorough analysis before opting for a moratorium. Moreover, one should have confidence about their future income as later they have to stick to the revised repayment schedule. If a person defaults after the moratorium period, then it could have some serious impact in terms of cost and future access to credit. One should treat a moratorium as the last resort to manage a loan account. Lastly, one should not avail moratorium if they can pay off their EMIs on a timely basis.