Loan moratorium: Everything you need to know about it

Several banks, including housing finance provider, HDFC Bank, have issued fresh guidelines on the EMI loan moratorium 2.0. Under the new norms, HDFC Bank borrowers, with single loan or overall exposure less than Rs 25 lakhs, can apply for their loan restructuring till September 20, 2021. To deal with the impact of the Coronavirus pandemic on borrowers, the RBI has, so far, announced two loan moratorium or loan restructuring schemes. In this article, we examine both these schemes in detail.

What does loan moratorium mean?

According to the Oxford Dictionary, a moratorium on something is a temporary stopping of an activity, especially by an official agreement. So, if the RBI offers a moratorium on home loans, it means that those who are unable to pay their home loan EMIs for the period for which the moratorium is in effect, are not to be classified as loan defaulters. However, do note here that this information would have a mention in your credit records, even though banks may not judge you negatively for this.

Documentation for EMI restructuring

You would have to sign the restructuring agreement after your bank gives its go-ahead for the same. If you are the sole borrower, the bank will provide digital options for signing the agreements. In case there are more than one applicants, all of them will be required to accept the terms, by putting their physical signatures on the application and revised agreement. The new agreement will need to be submitted at the nearest customer service desk. The customer will get a copy of the revised terms and amortisation schedule, on their registered mail ID or post.

Loan moratorium 2.0: RBI’s resolution framework for loan restructuring

With an aim to support borrowers who are currently reeling under the monetary impact of the second wave of the Coronavirus pandemic in India, Reserve Bank of India (RBI) governor Shaktikanta Das, in an unscheduled virtual speech on May 5, 2021, allowed banks in India to offer a second loan moratorium.

“Borrowers, i.e., individuals and small businesses and MSMEs having aggregate exposure of up to Rs 25 crores and who have not availed of restructuring under any of the earlier restructuring frameworks (including under the Resolution Framework 1.0 dated August 6, 2020) and who were classified as ‘standard’ as on March 31, 2021, shall be eligible to be considered under Resolution Framework 2.0,” Das said in his speech. However, whether the restructuring facility allowed by the RBI could include a moratorium, would be at the banks’ discretion.

The move by the RBI came over a month after a plea was filed in the Supreme Court, seeking a moratorium of six months on the repayment of bank dues owing to the second wave of COVID-19. In his the plea filed on March 30, 2021, one advocate Vishal Tiwari, while blaming the centre and the RBI for not doing enough to mitigate the exigencies caused by the Coronavirus crisis, pleaded the top court to direct banks not to take action against individual loan defaults nor declare loan accounts as non-performing, for six months.

RBI moratorium 2.0: Eligibility criteria

Borrowers, who did not avail of the facilities offered during the first loan moratorium, can avail of the benefits provided under the second one. Borrowers, who availed of the facilities offered during the first loan moratorium, can also avail of the benefits provided under the second one, for up to two years. Also, to be eligible for the second moratorium, the borrower’s account must not show any default on loan repayment till March 31, 2021. Typically, a loan account is declared as defaulting if the repayment is not made for 90 days or more.

What if you already availed of a loan moratorium?

Those borrowers who opted for the loan moratorium 2020, are also eligible to get the benefit under the second moratorium. However, the remaining tenure can only be extended up to two years.

“In respect of individual borrowers and small businesses that have availed of restructuring of their loans under the resolution framework 1.0, where the resolution plan permitted a moratorium of less than two years, lending institutions are being permitted to use this window to modify such plans, to the extent of increasing the period of moratorium and/or extending the residual tenor up to a total of two years. Other conditions will remain the same,” Das said.

See also: How to pay home loan EMIs in case of job loss due to the Coronavirus pandemic?

Loan moratorium 2.0: How to apply for loan restructuring?

Eligible borrowers can apply for the second moratorium till September 30, 2021. Provided you fulfill the eligibility criteria, your bank will take up to 90 days to offer the facility to you.

(With inputs from Sunita Mishra)

Loan moratorium 1.0

In 2020, the RBI announced a moratorium for home loan borrowers for three months, between March 1, 2020 and May 31, 2020. This was extended by another three months, to August 31, 2020, to offer support to banks and borrowers, as the first wave of the Coronavirus infection exacted huge financial costs, forcing millions into joblessness. The time for applying for the first moratorium ended in December 2020. Later, the RBI allowed the moratorium as part of a restructuring scheme, where the loan moratorium could be extended up to a total period of two years.

Loan moratorium : What did the RBI’s scheme offer?

In the wake of the COVID-19 or the Novel Coronavirus outbreak and the financial jolt that it may have caused for many, the Reserve Bank of India (RBI), in an attempt to provide some relief to those struggling with liquidity, announced some relief, on March 27, 2020, in the form of a moratorium on term loans for three months, ending on May 31, 2020. On May 22, the RBI extended this moratorium further by another three months, up to August 31, 2020.

Given a series of defaults in repaying the loans, the Supreme Court and the centre have been looking to come up with a breather for all stakeholders. In 2020, the centre had taken a decision to allow waiver of interest on interest in eight specified categories, for loans up to Rs 2 crores. However, the SC bench did not find any rationale behind the move and on March 23, 2021, the apex court directed that there should be no charging of compound interest, interest on interest or penal interest on the installments that were due during the loan moratorium period from March to August 2020 on any borrower, irrespective of the loan amount. In case interest has already been collected, it should either refunded to the borrower or adjusted towards the next instalments.

However, complete interest waivers are not allowed, because banks have to pay interest to depositors and pensioners.

As of April 2021, in a circular to all lenders, the RBI has said that all lending institutions should put in place a board-approved policy to refund or adjust the interest on interest charged to the borrowers during the moratorium period. The method for calculation of such refunds would be provided by the IBA.

1st loan moratorium: Key highlights

Coronavirus and impact on credit score

Credit scores of many have been affected and this would be a pain point, not just for the person in question but the banks as well, since recovery has become tougher. Further interest waivers may be important at this stage.

Additional liquidity looks necessary

Kapil Sibal, on behalf of CREDAI Mumbai, has said that the moratorium should be extended to the end of the financial year 2021. Not just that, an emergency credit line plus additional liquidity needs to be pumped.

Loan moratorium impact on borrowers

1. What does a 6-month moratorium on repayment mean, for home loan borrowers?

A six-month moratorium allows you to defer your EMI payments by a period of three months. This should not be mistaken for a total waiver. If your instalments were due between March 1, 2020 and August 31, 2020, the RBI has now permitted your bank to allow you to postpone the repayment. However, your bank is not obliged to do so. It may or may not allow it.

2. Will I have to pay extra as interest, if I choose the moratorium?

Yes, you will be paying more as interest, if you choose to avail of the moratorium. Let us see how that works.

Suppose you had taken a home loan of Rs 70 lakhs at 9% interest for a period of 20 years from Allahabad Bank. The monthly installment in this case comes to Rs 64,400. In case you choose to take the moratorium for three months, the interest will continue to accrue which comes to Rs 1,58,684. This will be added to your overall liability.

Hence,

Principal: Rs 70,00,000

Interest Payable: Rs 82,99,365

Interest for moratorium period: Rs 1,58,684

Total amount payable: Rs 1,54,58,049

Total amount payable if moratorium not availed: Rs 1,51,15,396

While you will be paying a higher amount when you repay the EMIs, the moratorium on housing EMIs will help you rearrange your finances in the short-term. On the other hand, if you do not opt for the moratorium, you would end up saving Rs 3,42,653.

3. Will moratorium be applicable on principal repayment, interest repayment or both?

The moratorium will be applicable to both principal and interest, that is wherever you are paying either EMIs or Pre EMIs. The interest, at the applicable interest rate, shall keep on accruing on the outstanding portion of the loan during the moratorium period.

4.Will opting for the moratorium affect my credit score?

No, the advantage of seeking this moratorium is that it will not show up as a default in your credit score. Further clarifications are awaited from financial institutions.

5. Is there any penalty that will be charged

No, neither will there be any penalty charged nor will your credit score be compromised during this tenure.

6. What if I have multiple loans running?

The moratorium facility will be extended to all your term loans. However, you must check with your respective banks, whether they would want you to opt-in or opt-out of this facility.

7. What will be the effect of a 6-month moratorium on the self-employed?

In light of the example given above, you could say that the extra interest accrued is a small price to pay, given that some self-employed borrowers may find it tough to repay, with most businesses suffering losses due to the lockdown. In the six months, a self-employed businessman/woman can divert this EMI amount and use it elsewhere. Hence, there is no immediate worry of losing out on one’s liquidity. After a period of three months, the borrower can go back to paying his monthly dues with the knowledge that he/she will be now repaying a higher amount.

8. What will be the impact of a 6-month moratorium on new borrowers?

It will have the same effect, as on any other section. You will be able to defer your payments by three months. However, you should know that since it is not an interest waiver, you are not getting any discount. If you have the financial appetite to keep repaying, you must do so. This will help you save some money. However, if you are suffering because COVID-19 has taken a toll on your finances, you should go ahead and avail of the moratorium, if your bank is offering the same.

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EMI moratorium guidelines by banks and financial lenders

9. Is the moratorium meant for only nationalised banks, or all banks in general, including co-operative banks?

All lending institutions that is 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, have been permitted to allow the moratorium.

10. Is this a loan waiver (for three months) or a deferment?

Note that the RBI has only agreed for a deferment of the term loan. There is no waiver or discount or concession. Deferment also accrues charges.

11. What if I have already paid my EMI for the month of March 2020?

Most borrowers give the Electronic Clearing Service (ECS) mandate for the first week of a month. Therefore, for many an EMI that was due in March, would already have been paid. For such borrowers, EMIs can be deferred by two months only – that is, for April and May, 2020 (in case of three-month moratorium).

12. What if my EMI was due on March 28, 2020?

You may want to check with your respective bank about refunds. For example, ICICI Bank has said that it may consider refunding EMI for March if it was debited post March 27, 2020. ICICI Bank guidelines read as follows, “EMI paid prior to Mar 27, 2020 will not be refunded. However, if any EMI is debited after Mar 27, 2020 and the borrower customer opts for moratorium then such EMI may be considered for refund at the request of the borrower/ customer.”

13. Is moratorium facility available for NRI borrowers?

Yes, the moratorium facility is applicable for NRI customers as well.

14. Will the banks automatically apply the moratorium, or does the borrower have to approach the bank?

Individual banks will come up with their own criteria. Experts opine that since the RBI has used the word ‘permitted’ and not directed, most people may have to request their banks to grant them the moratorium. State Bank of India however has already allowed all borrowers to avail of the moratorium, irrespective of whether they need it or not. There is clarity awaited from other banks. RBI has asked banks to prepare policies approved by their board to provide relief to all eligible borrowers.

15. Is the moratorium applicable to individuals, or corporates too?

As per the RBI, the moratorium is permitted for all but banks can come up with their own parameters of determining eligibility. This confirmation and set of guidelines is awaited from various banks and we will update this article accordingly.

16. Does it apply to those who are getting full salary during the lockdown period?

The economic impact of the COVID-19 may apply to all – both, salaried, as well as the self-employed. For the salaried, the economic impact may be in the form of pay-cuts, delay in salary payments or even layoffs. Therefore, the RBI has taken this step in anticipation, to ease the financial stress of many. More details are awaited from the individual banks. Eligibility criteria will be announced soon.

17. What can I do if my bank does not offer a moratorium?

As already stated, it is totally up to the banks to offer the moratorium to you. In RBI’s words, “Lending institutions shall frame board-approved policies for providing relief to all eligible borrowers, inter alia, including the objective criteria for considering reliefs and disclosed in public domain.” Note the word ‘objective’. It is not on a subjective basis but on objective grounds that your bank will establish a criteria to roll out this moratorium.

If the bank doesn’t offer this relief, you may run the risk of losing your property, if you do not pay your EMIs.

Loan moratorium : Commonly asked questions

18. Is the home loan moratorium a new concept?

Moratorium is not a new concept. Most borrowers who buy an under-construction property ask for a moratorium period. Agreeable banks usually offer up to three years of moratorium. However, in such cases, banks generally insist that the borrower pay the interest during the moratorium period, also called pre-EMI interest. After a period of three years, the full EMI is paid by the borrower. In the case of a ready-to-move-in property, banks typically give a moratorium of three to six months.

19. How will lending institutions benefit with this move?

Note that lending institutions are not waiving the EMI or the interest. They are simply allowing you to defer your payment for which interest is applicable and accruing. Lenders will profit from this interest. Take for example, SBI’s term loan book which is big. The bank’s chairman Rajnish Kumar has said that the moratorium move will bring in more. Talking to the media, he said, “Our term loan book is fairly large and I think Rs 2-2.5 trillion gets paid every year, so for three months it would be Rs 50,000-60,000 crores.”

20. What are some of the other term loans?

Term loans are secured loans (at times unsecured) and the borrower must repay the loan with interest, within a definite and specified period of time. Some examples are agricultural term loans, retail loans, crop loans, vehicle loans, education loans, personal loans, etc.

Housing recommends

Please note that if you opt for the moratorium, interest will continue to accrue. Here’s an example to help you.

Dev Sharma availed of a housing loan on March 1, 2020 amounting to Rs 1 crore with loan tenure of 236 months. If Sharma wants to avail of a moratorium on the instalment of Rs 90,521.00 which is due on April 1, 2020, then, the interest for the month of March amounting to Rs 75,000 will be added to the principal amount and the revised opening principal amount on April 1, 2020 will become Rs 10,075,000. The interest will be computed on the revised principal. Similarly, the interest for the month of April which is payable on May 1, 2020 of Rs 75,562 will be added to the opening principal on May 01, 2020, which will be Rs 10,150,562. The interest will be computed on the revised principal. In this case, Sharma’s tenure will increase from 236 months to 249 months, considering the unchanged rate of interest and instalment amount during this period.

Hence, if you are not financially stressed at this point of time, go ahead and pay your EMIs. This will save you some money.

Important conditions, to avail of the loan restructuring

Both, corporate and retail borrowers, will not be pulled up for defaults for the time being. The option of loan structuring is being offered to those who have been genuinely hit. Note the following:

• If you plan to avail of the restructuring facility, be ready with concrete proof, such as letter of termination or salary cuts from your office, or your accounts of losses incurred in business, etc.
• The restructuring will be provided to only those, whose debts were not overdue by over a month as on March 1, 2020.
  If you did not avail of the moratorium, you may still be able to restructure your loan.
• Restructuring does not affect your credit score, although it will be reported to the credit bureaus.

Banks’ rules for loan moratorium

Most banks took to Twitter to announce their guidelines about the first moratorium period.

State Bank of India

For details, visit https://www.sbi.co.in/stopemi

Punjab and Sind Bank

For more details, visit: https://www.psbindia.com/document/Advisory.pdf

IDBI Bank

For more details, visit: https://www.idbibank.in/faq-covid-installment.asp

HDFC Bank 

For more details, visit: https://www.hdfcbank.com/personal/pay/payment-solutions/loan-repayment

ICICI Bank

All the other banks have also allowed the moratorium which includes Canara Bank, Andhra Bank, UCO Bank, Indian Bank, Syndicate Bank, Indian Overseas Bank, Bank of Baroda, Central Bank of India, Oriental Bank of Commerce, Punjab National Bank, Bank of India, Allahabad Bank, Union Bank of India, Corporation Bank.

Note: Some banks want customers to opt-out of the moratorium option if they do not wish to avail of the moratorium. Some others do not want you to take any action, if you want to continue paying your EMIs. It is advisable that you check with your bank for details published online.

EMI moratorium news updates

SC judgements on loan moratorium 2.0

The Supreme Court, on June 11, 2021, rejected a petition that requested India’s apex court to give directions to the centre to offer a loan moratorium, keeping in view the monetary stress caused by the second wave of the Coronavirus pandemic.

While stating that they were not ‘experts on matters of finance’, the SC bench headed by justice Ashok Bhushan said it was not for the courts to dictate government policies. While striking down the plea, the top court also observed that the centre had ‘so many things to do’, including vaccinating people and attending to migrant workers, to cope with the devastating impact of the health emergency and it could not interfere with the government’s decision to fix priorities for relief during the pandemic.

It was up to the government to assess the situation and pass an order about loan moratorium, said the SC, adding that the issues raised in the petition, filed by one Vishal Tiwari, were in the realm of policy decisions.

Recall here that the Reserve Bank of India (RBI), in April 2021, allowed banks and housing finance companies to restructure loans given to individuals and small businesses, in view of the financial strain caused by the fragmented lockdowns imposed by several states in India, to contain the second wave of COVID-19. Under the fresh guidelines issued by the banking regulator, financial institutions were allowed to restructure loan exposures up to Rs 25 crores, which were standard as on March 31, 2021.

“Resurgence of the COVID-19 pandemic in India and the associated containment measures adopted at local and regional levels, have created new uncertainties and impacted the nascent economic revival that was taking shape. In this environment, the most vulnerable category of borrowers are individual borrowers, small businesses and MSMSEs,” RBI governor Shaktikanta Das said, while announcing steps to deal with the impact of the second wave. Following the RBI’s announcement, several public and private banks started offering loan restructuring to their customers.

(With inputs from Sunita Mishra)

EMI bounce rate increases in June 2021

July 7, 2021: Because of the monetary stress caused by the second wave of the Coronavirus, the failure rate of auto-debit transactions, which includes debit requests for home loan EMIs, rose in June 2021, as compared to May, in spite of states relaxing lockdowns restrictions. Data released by the National Payments Corporation of India show that of the 87.87 million debit requests made in June 2021 over the National Automated Clearing House (NACH) platform, 32.08 million bounced. This accounts for 36.51% failure. The comparable bounce rate for May 2021 was 35.91%. In April 2021, it was even lower at 34.05%. More importantly, note that the second wave of the pandemic was at its peak during April and May.

(With inputs from Sunita Mishra)

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