Moratorium Period: Working, Examples and Calculation (2024)

What is a Moratorium Period?

A Moratorium on loan is a specified period during which the borrower is not obligated to make EMI payments of their loans as mandated by the Reserve Bank of India. The moratorium period in loan postpones repayment and gives the borrower a grace period during which they can choose to not make EMI payments for a loan. Apart from the Moratorium on Loan, which was recently provided as a relief post the COVID-19 pandemic, it has been widely used for some types of credit such as education loans to borrowers who require a certain grace period before they can start repaying the loan.

How Does a Moratorium Period Work?

Normally, a moratorium period starts as soon as a loan is approved. It is mostly extended to allow the borrower more time to organise their money and get ready to repay the loan. A loan’s middle stage also has a moratorium period where the lender permits the borrower to stop making payments for a specific reason – for instance, financial hardship over a predetermined length of time. It should be remembered that the loan’s interest typically builds up throughout the moratorium.

Moratorium Example

An individual takes out a loan and has an Rs.5000 monthly payment but the person’s financial situation worsens to the point that they are no longer able to pay Rs.5000, they call their bank and request a suspension of the loan instalments. The bank consented to a six-month moratorium during which the person would not be required to make any payments.

Moratorium Period RBI Circular and Guidelines

Since the RBI’s guidelines on moratoriums are dynamic to the circ*mstances they are announced in, let us look at the norms announced March 2020 to understand the general guidelines:

• The Reserve Bank of India (RBI) announced a three-month moratorium on loan repayments by individuals and businesses as a relief measure for those affected by the coronavirus outbreak. This was then extended to August 31, 2020.
• Under the moratorium, borrowers did not have to make any payments towards their term loans for three months, beginning 1 March 2020.
• The RBI also advised banks to provide a grace period of 60 days for the repayment of all types of loans, including credit cards.
• The decision was aimed at providing relief to those who may face difficulties in repaying their loans due to the outbreak.
• It was also expected to help ease the burden on the banking sector.
• The RBI also asked banks to offer a restructuring of loans for those who were unable to repay their loans due to loss of job or business or life or other factors led by the Coronavirus outbreak.
• This involved extending the loan tenure or reducing the interest rate.

Eligibility for a Loan Moratorium Period

1. When the COVID-19 hit us, the RBI stated that choosing the moratorium was voluntary, and anyone with an outstanding loan with EMIs due between March 1, 2020, and August 31, 2020, would be eligible to avail of the moratorium.
2. Whenever the RBI or banks announce a moratorium, they carefully lay down specific guidelines and eligibility criteria, mentioning the details about who is eligible to avail moratorium. 3. The eligibility criteria are dynamic and change whenever a moratorium is announced due to economic distress.
3. The RBI may impose a moratorium and borrowers may become eligible for a moratorium in cases of natural disasters, economic catastrophes, wars, and even terrorist attacks.
4. A moratorium is not an obligation of the banks or a right of a customer. It is purely the lender’s discretion whether to offer a moratorium or not.

Formula and Calculation of Moratorium period

Using this formula you can calculate your moratorium period,

interest = balance * (1 + r)i – balance

where:

• balance – Opening balance at the beginning of moratorium;
• r – Monthly interest rate; and
• i – Number of moratorium periods.

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

Your lender will use the idea of simple interest to determine the interest on your loan during the moratorium period. The interest will only be calculated on the actual amount offered, not the total amount of the loan. The loan’s principal amount and any interest accrued during the moratorium period will be put together after the accrual of interest. As a result, you will have to start making payments on your EMIs after your EMI holiday is ended. These payments will include both the principal and the interest that accrued during the moratorium period.

Benefits of the Moratorium Period in a Loan

Here are some of the key advantages a borrower is entitled to when they choose to accept the moratorium.

1. A Better Repayment Strategy

A Moratorium on a Loan can assist a borrower in developing a stress-free repayment schedule. It can also assist them in accumulating funds from various sources and beginning repayment in a systematic manner rather than diluting assets to repay the loan.

2. Helps During Financial Crises

The COVID-19 outbreak has served as a sobering reminder of the global economic consequences of a pandemic. Thousands of people have had their savings wiped out owing to job losses, pay cuts, and the passing away of family members. As a result, many people faced a cash crunch apart from the emotional tax of losing a loved one. In such a circ*mstance, a moratorium on loans proved beneficial since it helped millions of people wade off an impending financial crisis.

3. No Negative Impact on Credit Score

One of the most essential advantages of a loan moratorium is that it has no negative impact on your credit score. Simply put, non-payment of loans in regular instalments has no negative influence on a borrower’s credit score during the moratorium period. As a result, a moratorium has no bearing on your borrowing capacity.

Disadvantages of the Moratorium Period in a Loan

1. Loan Tenure Increased

Moratorium on the loan automatically increases the tenure of the loan. It might affect your long-term financial goals and dent your investment plans.

2. No Interest Waiver

One of the most significant disadvantages of a loan moratorium is that repayment is not waived but just deferred. This indicates that you owe interest to your bank or lender as a borrower. Moratoriums might also result in increased interest costs, putting additional strain on your future payments.

3. Sudden Burden

While a brief halt from debt repayment may provide some relief in the near term, the fact remains that the interest owed will eventually catch up with you. If you haven’t planned ahead, the unexpected pressure of large payments might throw your monthly budget off and disrupt your cash flow.

Differences Between the Moratorium Period and Grace Period

EMI Moratorium on Term Loans

The Central Bank of India declared that all banks and non-banking financial institutions (NBFCs) are permitted to offer a 6-month moratorium on all terms loans, but not limited to personal loans, house loans, and school loans, for the payment of the Equated Monthly Instalments (EMI). This is for the unpaid as of the first of March 2020. This applies to all cooperative, rural, regional, and NBFCs, including housing finance companies.

Loans that Come with a Moratorium Period

1. Home Loan

A home loan is a loan that is provided for the purpose of purchasing a house or a flat which follows fixed or adjustable payment conditions and interest rates.

A moratorium period refers to a period during which your lender does not ask you to make any repayment. The borrower may be short on finances or experiencing financial difficulties during this time period and the lender will acknowledge their current financial situation and give them a few months to sort things out and get their life back on track. Once they sort things out, they can begin rapidly paying off their loan by clearing the EMIs. To prevent a borrower from missing any EMIs or fleeing without paying back the loan, a bank or an NBFC grants a moratorium term during financial hardship.

2. Student Loan

A loan that is taken out to pursue higher education is known as Student Loan. The student would not have income at that time to repay the loan since a student or a student’s parent or guardian applies. So, the loan can be repaid whenever the student completes the course and begins to make money from their work. This gap in the loan tenure during which the borrower does not have to pay anything is known as the moratorium period. The moratorium in student loans can vary depending on the amount of loan taken.

Final Word

A Moratorium loan gives you short-term relief from the repayment of loans during financial hardships, although it temporarily halts EMI repayment and assists those who face difficulties in repaying their loans, it is entirely optional and not mandatory for all borrowers.

However, borrowers must remember that applying for a moratorium does not provide any relief for interest amount during the period of the moratorium. Hence, it is advisable to avoid a moratorium if you can sufficiently the means to pay the EMIs on time.

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