These are financially difficult times we live in. The increasing cost of life has us taking loans and sometimes repayment poses a threat. This situation gave birth to a moratorium – a sigh of relief to the personal loan borrowers.

The moratorium period saves you from penalties by offering a temporary halt on loan repayments, as long as your bank agrees to it.

Let’s explore how a moratorium period works and how it can offer a breather that postpones financial challenges.

What is a Moratorium Period?

A moratorium period is a grace period that a borrower can request from their bank. You are not obligated to make the EMI payments on the loan amount during this period. Regulated by the Reserve Bank of India (RBI), this grace period worked wonders during the COVID-19 pandemic.

Having understood the moratorium period meaning, let’s take a look at its purpose:

  • A loan moratorium extension eases immediate financial strain by permitting a temporary suspension of loan repayments.

  • It makes it possible for you to rearrange your spending and look for new revenue streams.

  • It is a comprehensive set of regulations or economic policies designed to lessen the negative effects that unanticipated catastrophes or economic crises can have on people and businesses.

How Does a Moratorium Period Work?

The way a moratorium period operates is that it reduces or temporarily suspends the obligation of borrowers to make timely loan payments. Here’s a thorough explanation of how it works:

1. RBI Loan Moratorium Application

Applying for an RBI loan moratorium extension requires borrowers to work with their bank or financial institution, which will evaluate their case and decide whether or not they qualify based on predetermined standards.

2. Loan Moratorium Extension Period

Once authorized, the moratorium period starts. Depending on the severity of the crisis and the lender’s policies, this time might vary in length but often lasts one to twelve months.

3. Accrued Interest

Interest on the principal amount may continue to accrue throughout the moratorium. This implies that, unless the moratorium stipulates otherwise, even though the immediate financial strain is lessened, the total amount owed may rise.

4. Time to Pay Your Debt

Borrowers are expected to restart their usual payment schedule following the expiration of the moratorium period. 

Examples of Moratorium Periods

Let’s take a look at a real-life example and become well-versed with it:

Person X takes out a loan with a monthly payment of ₹10,000. Her financial status deteriorates to the point that repayment becomes an issue, she then contacts her bank and requests a suspension of the loan payments.

The bank gives her a six-month moratorium period during which she is not obligated to make any payments. Once the six months have passed, she must start making her regular loan payments. 

RBI Circular and Guidelines on Moratorium Periods

RBI has issued various circulars and instructions on moratorium periods, primarily in reaction to economic disturbances such as the COVID-19 epidemic. Here is an outline of significant RBI loan moratorium circulars and rules: 

  • All lending institutions, including banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs), were allowed to impose a moratorium on instalment payments for term loans (including retail loans and corporate loans) and interest on working capital facilities.

  • Given the changing scenario and continuous stress in many sectors of the economy, the RBI allowed lenders to extend the moratorium period for an additional three months.

  • The RBI also instructed banks to give loan restructuring to those who were unable to repay their loans owing to job loss, business failure, or death, among other causes caused by the Coronavirus pandemic.

  • Borrowers were not required to make any payments on their term loans for three months commencing March 1, 2020, as part of the moratorium.

Interest Calculation During a Moratorium Period

During the moratorium period, your lender will calculate your loan’s interest using the notion of simple interest. The interest will be calculated solely on the amount offered, not on the total loan quantum.

The interest charged on the loan during the moratorium period will be added to the principal amount of the loan. As a result, after the moratorium period ends, you will need to begin paying your EMIs, which will include both the interest accumulated during the moratorium period and the principal amount. The following formula can be used.

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.

Disadvantages of a Moratorium Period in a Loan

The moratorium period has the following disadvantages:

  • The loan’s duration is automatically extended due to the moratorium.

  • If you haven’t planned, the sudden strain of hefty payments may affect your monthly budget and financial flow.

  • Repayment is not waived but rather postponed.

Differences Between Moratorium Period and Grace Period

The moratorium period is often confused with the grace period. However, the two hold significant differences, as highlighted below: 

Moratorium PeriodGrace Period
You are not obligated to make loan payments for a set period.A time when you can pay after a payment without incurring a penalty.
It is longer than the grace period.If a grace period is offered, they offer it to all their customers automatically.
Interest may be chargedNo interest is charged
It is similar to a forbearance or deferment.Not required by law

Loans That Come with a Moratorium Period

You can avail of a moratorium period on the following loans:

  • Home loans

  • Personal loans

  • Education loans

  • Credit card dues

Conclusion

The moratorium period provides a reassuring lifeline during difficult circumstances. If you apply for a moratorium period, utilize the chance to prioritize and plan, knowing that this little stop will pave the road for a more robust, resilient financial future. 

Whether pursuing new chances or simply taking a breather, the moratorium period allows you to navigate your financial journey with confidence and clarity. 

FAQs

Is the moratorium period good or bad?

While a moratorium can ease financial strain in the short term, it adds months to your repayment schedule. Consider your situation carefully before opting in.

Is moratorium permanent?

No, a moratorium period is not permanent. It is a temporary period that pauses your EMI payments within the timeframe. 

Can the moratorium period be cancelled?

Yes, you can cancel the moratorium period. You will have to request your lender to start the cancellation process.