Moratorium on account of Covid-19: What you should know

What is meant by the moratorium given by the government?

The moratorium is for payment of all instalments falling due between March 1, 2020 and May 31, 2020. According to the RBI, the 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 (EMIs); (iv) credit card dues.

So, if you have any repayment of loans – whether as interest or principal – it will be covered under the scheme

In the case of Working Capital limits like OD/CC, normally, you will have to pay the interest and the moratorium applies to that interest also.

How is this moratorium being given by Banks?

Each bank has published its own guidelines. Some banks have given a automatic moratorium for all borrowers. Eg. Central Bank of India, UCO Bank, IDBI Bank etc. But most of the banks have asked the customers whether they opt for moratorium or not.

Some banks informed customers that they will be eligible for moratorium, unless they opt out and some banks have said they will NOT be given moratorium unless they opt in. So you have to contact your bank to ascertain what action you have to take. Most of the banks have given the option facility in their portal. Some banks have given an SMS option also.

What will happen if you opt for moratorium?

Moratorium is only for repayment of loans. But most banks have informed that they will continue to charge interest on the loans. Only point is, you need not pay it immediately.

For example, ICICI Bank has said that interest will be debited and added to your principal outstanding. Similar is the case of HDFC Bank also.

It means, the interest will be added to the Principal. The fallout of this is, when the bank calculates the interest for next month, say April, your loan outstanding will be more by the interest charged for the month of March also. So, in effect, you will be paying interest on interest also.

What will happen to the tenure of your loans?

If you opt for the moratorium, your period of repayment will be further increased.  Considering the loan amount and interest rate, your period of repayment may extend even more than the moratorium period. In this case, your EMI will remain the same.

You have another option to approach the bank and refix the EMI so that your loan is closed within the original term. But your EMI will increase.

So should I opt for moratorium?

This is the most important question. If you have enough cash flows to pay the EMI/Interest, then best course is not to opt for the moratorium. In that way, you will pay lower interest and your loan will be closed as per your original term.

But, if you are struggling with cash flow, it will be better to opt for it. Otherwise, you will be forced to borrow at higher rates to pay the existing loans, which may drag you into a debt trap.

Ultimately, what is the benefit that the customer gets?

As I said earlier, if you have cash flow issues, opting for moratorium will be beneficial. Further, if you fails to pay the EMI/Interest for 3 months, your account will be classified as Non Performing Asset (NPA) and you will be forced to settle all the loans in one go. Further, your name will be reported to CIBIL which will affect your credit rating and future borrowing capacity.

What is the impact on Banks?

The biggest advantage for the banks is that they need not classify the loan accounts as NPA. This will in turn, save them from making provision in their Profit & Loss Account. Hence, their profitability will show a better figure and their Balance Sheet will show a better picture.

The bigger beneficiary in this scheme of moratorium is the banks themselves.