LOAN MORATORIUM

By Antabikhya Gogoi, Legal Intern at Emkay Solutions and a 3rd Year B.A. LL.B.(Hons) Student at NLU Assam

INTRODUCTION

A loan moratorium, also known as EMI holiday, refers to a legally sanctioned period during which borrowers are granted temporary relief from repaying specific loan installments. This provision is often introduced during financial crises, economic downturns, or unforeseen circumstances, allowing individuals and businesses to manage their financial obligations without immediate pressure. A moratorium period postpones loan repayments, giving borrowers a temporary relief before they commence repayment through fixed monthly installments (EMIs). This allows them to defer payments immediately after loan disbursement, effectively benefiting from an EMI holiday, where they start paying EMIs after a designated break.

A moratorium period usually begins once a loan is approved, giving the borrower extra time to manage their finances before starting repayments. There is also a moratorium option during the loan term, allowing the borrower to pause payments for a set period, often due to financial difficulties. However, interest generally continues to accumulate during this time. 

Recently introduced as a relief measure following the COVID-19 pandemic, loan moratoriums have been commonly applied to certain types of credit, such as education loans, where borrowers need a specified grace period before commencing repayment.

WHY LOAN MORATORIUM? 

Loan moratoriums are typically introduced to prevent large-scale financial distress among borrowers and maintain stability in the banking sector. In India, the Reserve Bank of India (RBI) has historically introduced moratoriums in times of crisis to help borrowers stay afloat. 

One of the most significant loan moratoriums was announced during the COVID-19 pandemic in 2020, where the RBI allowed a six-month deferment on loan repayments to support individuals and businesses facing economic uncertainty. This measure helped borrowers manage immediate financial pressures and prevented widespread defaults, which could have destabilized the economy.

Common reasons for implementing loan moratoriums include:

• Economic downturns: Financial crises, such as recessions or global economic slowdowns, often lead to temporary relief measures like loan moratoriums. 

• Natural disasters: Events like floods, cyclones, or earthquakes may trigger moratoriums to support affected individuals and businesses. 

• Pandemics and unforeseen emergencies: The COVID-19 crisis highlighted how moratoriums can be used as an emergency measure during public health crises.

• Sector-specific distress: The government and RBI may introduce targeted moratoriums for industries struggling due to policy changes or international trade issues.

ELIGIBILITY 

Eligibility for a loan moratorium depends on the lender’s policies and the type of loan. Common criteria include: 

1. Financial Hardship – Borrowers facing job loss, medical emergencies, or other financial difficulties may qualify. 

2. Loan Type & Terms – Some loans, like education or home loans, have predefined moratorium options. 

3. Lender’s Approval – A moratorium is neither an automatic right for borrowers nor an obligation for banks. It is granted at the lender’s discretion, depending on circumstances and policies. The lender assesses the borrower’s financial situation before granting a moratorium. 

4. Regulatory Guidelines – Whenever the RBI or banks announce a moratorium, they set specific guidelines detailing who is eligible. For example, during COVID-19, the RBI allowed borrowers with outstanding loans and EMIs due between March 1, 2020, and August 31, 2020, to opt for a moratorium voluntarily.

5. Changing Eligibility – The eligibility criteria for moratorium relief are not fixed and may change based on economic conditions, such as natural disasters, financial crises, wars, or terrorist attacks.

   
   

INTEREST ON LOAN DURING MORATORIUM PERIOD

Even though payments are temporarily paused during a moratorium, interest continues to accumulate on the outstanding loan amount. Typically, lenders calculate this interest using the simple interest method, meaning it is applied only to the principal amount, not the total loan amount. 

Once the moratorium ends, the accrued interest is added to the principal, increasing the overall repayment obligation. Borrowers must resume EMI payments, which will then cover both the original principal and the accumulated interest from the moratorium period. Depending on the terms of the moratorium, banks may either add the accumulated interest to the principal (leading to higher EMIs post-moratorium) or extend the loan tenure to accommodate deferred payments.

ADVANTAGES OF A LOAN MORATORIUM 

For borrowers, a loan moratorium offers temporary financial relief, allowing them to prioritize essential expenses during challenging times. Some of the key benefits include: 

1. Avoiding immediate defaults: Borrowers unable to pay EMIs due to financial hardships can avoid being classified as defaulters. 

2. Cash flow management: Businesses and individuals can redirect funds toward essential needs without the pressure of loan repayments.

3. Preserving credit scores: Since non-payment is officially permitted during the moratorium, borrowers’ credit scores remain unaffected. 

4. Support for economic recovery: By reducing the financial burden on individuals and businesses, moratoriums help sustain economic activity during crises.

   
   

DISADVANTAGES OF A LOAN MORATORIUM

1. No Interest Waiver – A loan moratorium only postpones payments; it does not eliminate them. Interest continues to accumulate during the period, potentially increasing the overall repayment amount and adding financial strain in the long run. 

2. Extended Loan Tenure – Since payments are deferred, the loan tenure automatically extends, which can impact long-term financial goals and disrupt investment plans. 

3. Sudden Financial Pressure – While a temporary break from repayments may offer short-term relief, the accumulated interest can lead to a higher outstanding balance. If not planned for properly, this could result in unexpected financial stress, disrupting your monthly budget and cash flow.

   
   

ILLUSTRATION

Amit, a young professional working in a private company, has taken a home loan of ₹30 lakhs at 1 an interest rate of 8% per annum for a tenure of 20 years. His EMI amounts to approximately ₹25,093 per month. During the COVID-19 pandemic, Amit faced financial difficulties due to salary cuts. To ease his burden, he opted for the RBI’s 6-month loan moratorium from March to August 2020.

Impact of the Moratorium: 

1. Deferred EMI Payments: Amit did not have to pay EMIs for six months, giving him temporary financial relief. 

2. Accumulated Interest: Since interest continued to accrue on the outstanding loan amount, the deferred EMIs were not waived but added to his loan balance. 

3. Increased Loan Burden: After the moratorium, his loan tenure increased, or alternatively, his EMIs increased to adjust for the unpaid interest.

   
   

Calculation of Extra Interest Due to Moratorium:

• Interest accrued per month on ₹30,00,000 at 8% = ₹20,000 

• Interest for 6 months = ₹20,000 × 6 = ₹1,20,000 

• This additional interest was added to the principal, increasing the overall repayment amount.

Post-Moratorium Outcome: 

• Amit had to either pay an increased EMI of approximately ₹26,000 instead of ₹25,093, or his loan tenure extended by a few extra months. 

• Though he got temporary relief, the overall financial burden increased due to the additional interest.

CONCLUSION 

A loan moratorium is a double-edged sword—it offers temporary relief but comes at the cost of increased interest and potential financial strain in the future. Borrowers should make informed decisions, considering both immediate financial needs and long-term consequences. While moratoriums serve as an essential tool for economic stability during crises, they should be utilized wisely to avoid unnecessary financial burdens later.