What is a Moratorium?

A moratorium period is in a loan period in which the borrower does not need to make repayments. Think of it as a bonus time or grace period. It is actually the waiting period before the period of repayment starts.

While in the case of normal loans, borrowers need to start repaying after the principal amount is given, there are some loans in which this is not the case, such as education loans. In education loans, students start repayments after they get a job.

How does Moratorium Work?

Sometimes, a moratorium is made by banks in response to circumstances that disrupt the normal banking routine. The current economic climate created by the coronavirus pandemic has prompted many banks to adopt the moratorium system. This is done to reduce the pressure on existing and future borrowers till a certain time limit.

What is Moratorium Interest?

To get the moratorium facility on your personal loans or other loans, you need to pay an interest. It is called a Moratorium interest. It depends on one bank to another, but basically it is charged at the original loan rate for the time remaining for repayment of outstanding EMIs.

Is Interest Paid during the Moratorium Period?

Interest on the loan is not paid during this time. Think of it as an “interest-holiday” time. There’s no need to pay anything at this time. Rather, it is the best time to strengthen your savings and finances. Thus, once the moratorium period is over, you can be ready to repay it.

Moratorium Period for Business Loans

Moratorium periods can be found not just with educational loans, but also in mortgages and in some business loans. Here’s an example of a moratorium period for a business loan.

Let’s say that a company, who is a customer of a bank, is facing financial problems at the moment. It is unable to repay EMIs currently. It approaches the bank and asks for more time till they can make their financial situation strong. The bank, who only wants its money back with interest, agrees to give the moratorium period. 

Conclusion

Right now, most banks are giving a moratorium of 3 months to its existing and new customers. Yes, new customers can avail the facility as well after the payment of the appropriate charges. For instance, HDFC Bank has given a moratorium of 3 months to its customers. Other banks are following suit. So if you have an existing loan, you may want to use this time to strengthen your financial situation.

However, even the moratorium period offered by RBI has come under question as of late. Moody's opines that the loan moratorium could cause a greater build-up of credit loss for banks. India and China have both extended such measures to deal with the liquidity crunch amid the COVID-19 crisis. Although this can provide temporary relief to borrowers, it will constrain banks from taking proactive recovery actions and could lead to an even greater build-up of credit loss once the moratoriums are lifted, reports Moody's.

Moody's, in a report on the Asia-Pacific region on Tuesday, said that while policy stimulus will shore up credit quality for larger companies in sectors including airline and oil and gas, Asia's banking sector profitability would decline from falling asset quality and lower net interest margins.