Covid-19 pandemic is wreaking havoc around the world killing thousands of human lives and bringing down the economies of nations along with them, and the countries are fighting vigorously against this deadly disease to protect their citizen’s life and future. Our central and state governments are also facing same challenges and hardship in controlling the pandemic and trying their best save the lives. The economy of our nation has been declining for past several quarter despite various measure taken to recover it by our union government. The Union government and our country is facing dual problems. i) To control the pandemic from spreading further and ii) To take measures to reveal the economy and not allow it fall further. (Easier said than done, but what other options do we have?)
Now in order to ease the burden on individual, business entities, financial and non-banking financial institutions, the central bank of our nation (RBI) has put forward some measures. In one of those measures, Reserve bank of India (RBI) has permitted all commercial banks, Cooperative banks, Financial institutions and Non-Banking Financial companies(housing finance) to grant moratorium of 3 months on term loans(retail, agricultural loans and Crop loans) and working capitals facilities(Overdrafts,Cash Credits).The 3 months moratorium period starts from 1st march and ends on 31st May 2020.
Before getting detailed into the circular issued by RBI, let us understand the following banking terms:
Retail loans: Loans which are granted to public is grouped under the retail sector of banking business. The most common retail loans are
i)housing loans ii)personal loans iii)credit cards and iv)vehicle loan(Car &Two wheeler).
These are loans less risk averse compared to corporate loans and much preferred by banks nowadays.
Moratorium period: Moratorium is defined as the temporary stopping of any official agreement made between different parties(for eg. lenders and borrowers).Moratorium period is the time duration given for loan borrowers during interest is calculated but the demand to pay the interest is not raised during that time period. Moratorium period to loans (retail and agriculture) may vary from one loans to another depending upon the tenure and risk weight-age of the loans.
Accrued Interest: The interest calculated during the moratorium period which usually starts from the date of disbursement of loans. In most of the cases, the interest is calculated using simple interest and added with the outstanding balance or the loan disbursed.
Installments: The installments includes i) Principal and/or interest ii) bullet repayments iii) EMI (Equated Monthly installments and iv) Credit card dues.
Now to the prominent question in the minds of individual borrower and retail business borrowers.Will the moratorium period of 3 month benefit me as an individual borrower and as a business entity?
If you think that this announcement will waive or cancel your loan installments for 3 months, then you are completely wrong.RBI in its circular dated 27 March 2020 has clearly stated that only the installments shall be relaxed for 3 months but the interest shall continue to accrue on the outstanding balance of the loans for the months .That is to say, you have to pay the interest later.
The salaried individual who are fresh borrowers is advised to continue their payment of installments than to pay the accrued interest during these moratorium period. In case you are opting for the 3 month moratorium, you are left three options on repayment. First, you have to pay a bulk amount on the end of the moratorium period which will be the sum of three months interest on outstanding and the installment. Second, your loan tenure will be increased and installments remain same. Third, your installments get increased but loan tenure (period) remains same. In any of above cases, you are bound to pay some additional amount for the relaxation of the installments.
The benefit of this moratorium period is that there will be no downgrade of the loan into non-performing assets and their credit worthiness will be intact. Banks will provide necessary instructions to the customers and share the same with credit information agencies. The business entity who have availed loans under Retail sector are also eligible for the moratorium. Both the individuals and business entities should analyse their financial situations and then decide whether or not to avail the facility proposed by the concerned banks or other institutions.