The coronavirus brought along a lot of changes around us, and one of the most prevalent ones was the lockdown. A complete lockdown led to everyone staying in the house, a large number of business losses which eventually led to layoffs, and much more.
As a relief measure for all of the people affected by the pandemic, RBI allowed a three-month moratorium and term loans and credit card repayments. The financial and lending institutes were directed towards deferring their customer’s EMIs and opting for moratorium schemes.
Let us take a look at how a moratorium works?
In simple terms, moratoriums are temporary suspensions of the payment activity until resolved. These moratoriums are often enabled for temporary hardships and when an individual or institute cannot pay up their installment finances every month.
A suspension is often imposed in the aftermath of a disaster that disrupts regular operations. A government or the central bank can grant an immediate moratorium on certain financial activities in the aftermath of earthquakes, floods, droughts, or disease outbreaks. When normalcy returns, it is lifted.
What is the definition of a moratorium period?
A moratorium period is a tenure during which the creditor is not allowed to make any payments on the loan. It is a period of time before EMI repayments begin again. Repayment usually starts after the loan is disbursed and installments to be received on a monthly basis. However, owing to the moratorium era, payment only begins after a certain amount of time has passed.
The Benefits of a Loan Moratorium:
Moratoriums are assistance to reduce financial stress and conditions. Especially during the pandemic, when millions of people were left without an option. It gives a borrower some breathing space and liquid conditions. And in times of hardships, they can divert their funds towards more primary essentials.
The credit score is never affected when opted for a moratorium. Thus, not paying your loan will not impact your credit scores in any manner.
Additionally, the bank does not charge any penalties to the customers for not repaying for the moratorium period.
What are the Drawbacks of Loan Moratorium?
A moratorium is not a waiver; you must also pay your EMIs. Despite the fact that the EMIs will be withheld for six months, debt will continue to accrue on the accrued balance, resulting in an uptick in the monthly installment or loan tenure. As a result, you must plan accordingly.
If you have long-term debt, such as a home loan, the term of the loan can be extended. As a result, if you use the loan moratorium service, you will have to pay a higher interest rate over the loan term.
If you miss two EMIs, the loan will be extended for another 6-10 months.
The deferment expense does add up in the forthcoming loan EMI because the moratorium was just a delay and not a relief. This is a red flag for loans with a high-interest rate or EMI, loans in the early stages, or loans with a longer term.
You will have the option of paying the interest that had accrued during the moratorium period as a lump sum after the moratorium period had ended. However, if you can pay your loan EMI on time, this will be an unfair burden.
As compared to the existing interest rate, the loan’s interest would be higher and will have tax consequences.
What would be an effect on the Indian economy when there is a Moratorium?
In a moratorium, more like the one in the pandemic, what would be the state of the Indian economy, how did that moratorium affect the country?
Though the interest rates continue to occur on the loans that were taken, not paying the loans for months would lead to many sectors of business in the doldrums. As there would be a high amount of negligible revenue streams and sectors that would struggle to pay accrued and accumulated interest amounts. Though it was the urgent decision of the government and a much-needed one, the economy along with the people will take the hit of longer loan tenures, and struggles of interests.
Most of the Indian population had opted for RBI’s moratorium.
What would be the effect of yet another moratorium? Will it work for or against the country?
There were plenty of reports released after the moratorium period. Statistics and reports all supported the statement that any more relaxations on loans will hurt the economy terribly.
Along with hurting the economy, loan moratoriums will also affect society as a whole, inclusive of fund providers and takes. For instance, you can take into account your EMI Calculator, and measure the risen interest rates with the extended loan tenures.
The Impact of the loan moratorium is most likely one of the biggest waves an economy can financially witness. It is centric to all sectors, societies, etc.
This decision, in our view, has given banks a sigh of relief by preventing a total loss of nearly 6 lakh crores that would have resulted if the total waiver of interest had been allowed. Furthermore, the Court reached a just verdict thus upholding the principle of separation of powers.
This decision also provided relief from the interest-on-interest structure, preventing the creditors from incurring extra costs. However, given the government’s agreement to assume the burden of compound interest waiver, the ordinary taxpayer would bear the brunt of this exercise. This, along with the burden on borrowers and the economy’s shaky status, is likely to create a slew of problems that would require concerted action to resolve.
An insider tip would be, if you do not suffer from a cash crunch, the best option is to pay up your EMI’s on time, rather than opting for a moratorium if there ever comes the chance. There are always two sides to a coin, and so does the moratorium. Though it temporarily relieves an individual of debts, it does not waive the installments and finances that need to be paid.