Home Loan Moratorium – Everything You Need to know

A moratorium, though the term was there for a long time, it has become a buzzword when the Corona pandemic hit us hard in 2020. Economies around the world were closed, and we all witnessed a sharp decline in incomes and businesses.

People had less money, and Government came forward with a Moratorium and restructuring of loans to provide some relief in these distressing times.

We will explain all the relevant aspects of the Moratorium, RBI measures since the first lockdown imposed on 23rd March 2020, the difference from the restructuring of the home loan, and everything you need to know.

What is Home Loan Moratorium?

According to the Oxford Dictionary, Moratorium is putting a temporary pause on an activity by an official agreement. In terms of home loans in India, RBI decides Moratorium for loan borrowers.

In other words, borrowers will not be defaulters if could not pay EMIs during the Moratorium tenure. RBI decides the period, and lenders implement the procedure. If you have taken a Moratorium or will apply for the same, you should know that this reflects in credit score details but does not affect your eligibility.

Loan Moratorium 1.0 in the year 2020

In the wake of the pandemic, the Reserve bank of India declared Loan Moratorium 1.0 for three months between 1st march 2020 to 31st May 2020. Later the tenure was extended by another three months up to 31st August 2020. Borrowers were allowed to apply for the Moratorium by December 2020.

RBI offered the first Moratorium as part of the loan restructuring scheme 2020 and allowed the extension of the home loan Moratorium up to two years.

Note: The Hindu published a report from the Centre for Monitoring India Economy that India experienced one of the highest spikes in unemployment from under 7 per cent in mid-March to 27.11 per cent in the first week of May 2020.

The premise of the First Moratorium

• Unprecedented unemployment situation India has ever faced after the Independence

• Closure or extreme losses of businesses across the country due to complete lockdown

• No income led to loan defaults, psychological pressure on borrowers, financial commitment etc.

• To save the day, RBI announced Moratorium 1.0 in March 2020 to give the much-required time extension to repay home loans

Key Highlights of Moratorium 1.0

Loan Moratorium Period: 1st March to 31st August 2020 with a provision for an extension of two years

Eligible Loans: Home Loans, Loans on Credit cards, and all other EMI based loans

Eligible Applicants for Moratorium: All borrowers

Mode of Application: Online and Offline

Status of the Moratorium: Moratorium 1.0 has closed and lenders are offering to restructure the scheme

Loan Moratorium 2.0

To help small businesses and home loan borrowers still distressed due to continued lockdowns, low income, job loss, salary cuts, etc., RBI Governor Mr Shaktikanta Das announced loan Moratorium 2.0 on 5th May 2021.

He announced Moratorium 2.0 through a virtual meet. He said, ‘’Small businesses, MSME, and individual borrowers with an aggregate exposure up to twenty-five crores and have not applied or taken any restructuring benefits earlier, shall be eligible for Resolution Framework 2.0.’’ He further elaborated that banks will decide the inclusion of Moratorium within restructure scheme.

The premise of the Moratorium 2.0

• Prevalence and stronger second wave of Corona affected lakhs of businesses and jobs in 2021

• RBI consideration of a plea in the Supreme Court of India for a Moratorium of six months and not to declare loan accounts as NPA due to non-payment of EMIs during the devastating second wave of the Corona.

Eligibility for the Resolution Framework 2.0

• The loan borrower should not have taken benefits of Moratorium 1.0

• If applied, existing beneficiaries will get benefits up to the remaining tenure of two years from Moratorium 1.0

• No loan defaults and bad credit score up to 31st March 2021

• Understanding between lender and borrower. The reason for delay should be authentic and with sufficient proofs

Recent News and Updates

• There are no fresh extensions of the Moratorium as of September 2021. Banks and financial institutions are taking an aggressive approach towards loan defaulters and delayed repayments.

• Medical experts, Governments, and WHO has warned against the arrival of the third wave of Corona in October-November 2021.

Difference Between Restructuring of Loans and Moratorium on Loans

• The Moratorium can be referred to as a ‘loan holiday’ for a temporary period. It applies to all borrowers. Restructuring is exclusive to the few. It is a process to restore problems in cash flow between lenders and borrowers.

• The Moratorium can be a part of the restructuring scheme, not the other around. Restructuring is permanent; you restructure the loan to close the account.

• Restructuring is a win-win arrangement for lenders and borrowers. Moratorium mostly helps borrowers by extension of loan paying term.

Frequently Asked Questions on Loan Moratorium

1) How to apply for Moratorium 2.0?

Answers: Borrowers can avail themselves online or offline mode. The last date for the registration is 30th September 2021, and banks take up to 90 days for the processing of your request.

2) What are the extra charges for taking a Moratorium?

Answer: You will pay ‘interest on interest’. It means during the Moratorium period your interest will keep accumulating and will add with your payable amount after the Moratorium tenure. Because of this, several banks have suggested to no avail the facility and continue EMI payments.

3) How Moratorium will affect credit score?

Answer: According to RBI and Banks Moratorium would not affect credit score.

4) Can I apply for a Moratorium on several loan accounts and banks at the same time?

Answer: Yes, you can. Ask your lender and check their requirements for a Moratorium facility.

5) As an NRI, can I apply for a Moratorium and which bans are authorised to sanction a Moratorium?

Answer: The scheme covers all the Indians including NRIs. All nationalised banks under RBI supervision are participants of the Moratorium scheme.

Concluding Thoughts

A loan Moratorium is an arrangement for extreme financial distress, and you are not able to pay EMIs for business or home loans. It is advisable not to take a Moratorium because eventually, you will be paying much more than the principal because of ‘interest on interest’. Consult your banker and take an informed decision.