• What is Moratorium Period?

    A moratorium period refers to a particular period of a loan tenure during which the borrower does not have repay anything. It can be described as a waiting period before the borrower will have to start paying the equated monthly installments (EMIs) for his or her loan. Usually, when one applies for a loan, he or she will be required to pay the EMIs from day one until the last day of the loan tenure. However, when one has a moratorium period, he or she will not have to repay any amount to the lender. Even though you are not paying anything during this period, you will still earn an interest income. It will get accrued in your personal loan account.

    A moratorium period is mostly given for education loans. With the help of this period, the loan applicant who is the student in this case, will not have to repay anything during the moratorium period. Once the student completes his or her course and secures a job after graduation, he or she can repay the amount conveniently. The moratorium period is set by the lender and the applicant will need to adhere to it.

    A moratorium period is also sometimes known as an EMI holiday since you do not have to pay any EMI during this period. It is given to student loan applicants as well as salaried loan applicants.

    Many people prefer to choose an education loan over a personal loan due to the existence of a moratorium period, when they need financial assistance to pay course fees for an academic programme in the country or in any foreign country. When you apply for a personal loan, you will not get the benefits of a moratorium period. You will be required to repay the loan from the beginning, and this is difficult for someone who is studying in a college or a university. He or she can start making the payments only after they start earning.

    The main purpose of a moratorium period is to make sure that the loan applicant is financially ready to start repaying the loan.

    EMI moratorium on term loans

    During the latest announcement, The Reserve Bank of India has announced that all banks and Non-Banking Financial Companies (NBFCs) are allowed to offer a 6-month moratorium on all terms loans, including but not limited to personal loans, home loans, and education loans, for the payment of the Equated Monthly Instalments (EMI). This is for the outstanding as of 1 March 2020. This is applicable for all cooperative banks, rural banks, regional banks and NBFCs which include housing finance companies. RBI announced that the new moratorium date will be 31 August 2020.

    How is Interest Calculated on a Loan during a Moratorium Period?

    During a moratorium period, your lender will compute your loan’s interest by applying the concept of simple interest. The interest will be computed only on the amount that is actually offered and not on the entire loan quantum. The interest that is charged on the loan during the moratorium period will get ensued and then added along with the principal amount of the loan. Hence, after your EMI holiday is over, you will need to start paying your EMIs, which will include the interest accumulated over the moratorium period and the principal amount.

    Can I Pay my Interest Amount During the Moratorium Period? In case you are financially prepared to pay your loan EMIs during your moratorium period itself, you may be able to enjoy concessional interest rates. Hence, if you manage to fix your financial crisis, then it makes good sense to clear your loan during the moratorium period. This holds true, especially because during your moratorium period, the interest will be low. As the months pass, your interest will increase and you will be forced to pay a very high amount after your ‘repayment holiday’.

    Loans that Come with a Moratorium Period

    In India, very few loans are offered with a moratorium period by the lender. The two main loan options that offer a moratorium period include education loans and home loans. In order to understand why only these loans are provided with the benefits of moratorium period, let us try to understand how these two loans work.

    Education loan

    An education loan refers to a loan that is taken by a person in order to handle his or her education expenses. It is mostly taken to finance higher education courses such as graduation, post graduation, doctoral studies, research studies, etc. Since a student or a student's parent or guardian applies for this loan, the student wouldn't have income at that point to repay the loan. Hence, once the student finishes the course and then starts earning money from his or her job, the loan can be repaid. This gap in the loan tenure during which the borrower does not have to pay anything is known as the moratorium period. It is a very important element of an education loan. An education loan can be taken for education within the nation or outside the country.

    Home loan

    A home loan refers to a loan that is provided for the purpose of purchasing a house or a flat. They follow fixed or adjustable payment conditions and interest rates. In a home loan, the lender gives a certain moratorium period so that the borrower can take his or her time to manage all their other expenses and then start paying EMIs for the loan gradually. This EMI holiday is given to help out the borrower settle his or her finances. Differences between Moratorium Period and Grace Period Many individuals tend to think that a moratorium period and a grace period are similar. They often confuse a moratorium period for a grace period. However, the truth is that both are not the same. A moratorium period refers to a period during which your lender does not ask you to make any repayment. This period is given because the borrower may be short of funds or struggling with some financial hardship. Your lender will understand your prevailing financial condition and grant you with a few months to resolve your financial struggles and get back on track. Once this is done, you can start repaying your loan by clearing the EMIs promptly. A bank or an NBFC gives a moratorium period to a borrower in order to prevent the borrower from defaulting any EMI or from absconding without repaying the loan. On the other hand, a grace period is described as a period wherein some extra time is given to clear loan dues. This period is offered to a borrower when the loan repayment deadline arrives and the payment needs to be made. Your lender may give you a grace period during which you will not be charged any interest by your lender. The borrower will need to make sure the loan is cleared fully within the grace period. Once the grace period is over, in case the borrower still has not cleared the dues, he or she will be asked to pay late payment charges or penalties. During a grace period, interest will not be charged. A moratorium period and a grace period are somewhat similar as during both these periods, a borrower does not have to pay anything. However, a moratorium period is longer than a grace period. A borrower will need to request the lender for a moratorium period by stating his or her financial difficulty, and the lender will need to accept it. There is no surety that a moratorium period will be given to anyone. On the contrary, when a lender gives a grace period for a certain loan product, then all borrowers can enjoy this grace period. In a moratorium period, interest will most likely be charged, as opposed to a grace period, where interest is never charged.

    A moratorium period is a great feature that is offered by lenders to borrowers as it helps them sort out their financial difficulties and then start repaying the loan with a fresh start. Before you apply for a loan, you can check with your banker about all the terms and conditions regarding the moratorium period and then take a decision accordingly. Make sure you are aware of all the conditions associated with your repayment holiday so that it is a smooth process. When you are clear about the aspects associated with it, your moratorium period as well as the remaining period of your loan tenure will be effective and comfortable.

    FAQs on RBI’s EMI Moratorium

    1. Which lenders are allowed to offer the RBI’s EMI moratorium?

      The moratorium can be extended by any commercial bank, which includes regional banks, rural banks, and small finance banks. It can also be offered by cooperative banks and Non-Banking Financial Companies (NBFCs). Any all-India financial institution can also offer the moratorium.

    2. Will EMI deductions be automatically deferred or should the borrower opt for it?

      The RBI has permitted banks to offer the moratorium to customers. Guidelines are awaited regarding whether the suspension of EMIs have to be done at the level of the bank automatically or whether it has to be done at the individual level voluntarily.

    3. Will the EMIs being deferred have a negative impact on my credit score?

      No, this EMI moratorium will not affect your credit score in any way.

    4. Is this a deferment or a waiver of EMIs?

      This is not a waiver but a deferment of EMIs such that the repayment tenure and due dates are extended by 6 months since 1 March 2020 from the expiry of the moratorium.

    5. Does the moratorium include both the interest and principal amount?

      Yes, the moratorium includes both the interest and principal component of your EMI.

    6. Since which date is the moratorium applicable?

      The moratorium is applicable on loans that are outstanding as of 1 March 2020.

    7. Do I have to pay all the 6 pending EMIs in one go after the moratorium period ends or only in instalments?

      The RBI is yet to issues guidelines on this; however, it is more likely that the loan repayment tenure is extended by 6 months rather than paying the entire pending amount of 6 months in one go.

    8. Are credit card payments also covered under the moratorium?

      Credit cards are categorised as revolving credit and hence are not included under term loans, so they are not included in the moratorium.

    9. Does the RBI moratorium also include loans against credit cards?

      The RBI has not yet issued guidelines on this.

    10. Does the moratorium include both the principal and interest amount?

      Yes, the moratorium includes both the principal and interest amount that constitutes the Equated Monthly Instalment.

    11. Are working capital loans covered under the moratorium?

      Yes, working capital loans are also covered under the moratorium; however, only the interest amount is deferred in the case of such loans, with outstanding as of 1 March 2020. The accumulated interest will have to be paid after the moratorium period is over.

    12. Are business loans covered under the moratorium?

      The RBI’s guidelines have only mentioned retail loans, so business loans are not likely to be included.

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