What is a RBI Loan Moratorium?
Loan Moratorium is a period during which the borrower is not required to make loan installments. It is generally a period before the start of repayment of a loan. The moratorium may be allowed by the lending institution in various scenarios like during the construction period in a housing loan or for loans that are under stress due to external factors etc.
Because of the severe impact on incomes of various categories of borrowers due to COVID 19, RBI vide circular dated 27th March 2020 had allowed three months moratorium on loan repayments (including interest) falling due between 1st March 2020 and 31st May 2020. The facility was further extended by the Reserve Bank of India on 22nd May till 31st August 2020. The borrowers were not required to pay installments & interest due without affecting asset classification and Credit Score of borrowers.
In case you have availed RBI Loan Moratorium which was given as a CoVid 19 relief measure at any time from the period between March 2020 and August 2020 this article is a must-read for you.
Further in case of any specific query, you may leave a comment at the end of the article.
Five Most Important Things You Must Know To Avoid Huge Losses
The following is the list of most important things to know and to do in our opinion.
First: A Moratorium is not a Waiver of Interest & Installment(s)
The first and foremost advice from us is to “Pay if you can pay”.
Don’t confuse moratorium as “waiver” of interest and installments for 6 months. You are required to pay EMI due for the moratorium period along with additional interest for the extended period i.e. 6 months. The extension shall always be a losing proposition for the borrower. The longer the tenure of the loan and the higher the rate of interest, the larger shall be the extra repayment obligation.
Let us understand it with an example:
Let us assume you have availed a housing loan of Rs. 50,00,000.00 (Rupees Fifty Lacs) @ 8.50% repayable in 20 years. In this case, if you avail the moratorium for 6 months i.e. deferment of 6 EMIs, the overall loan tenure shall increase by 31 months i.e. you’ll have to pay 31 extra EMIs during the complete tenure of loan. Further the amount repayable shall increase by Rs. 1345000.00 (app. Rupees Thirteen lacs forty five thousand.)
Hence, if you can pay, do not opt for an extension of EMIs. Moreover, you need not pay all the EMIs at once; you may pay one additional EMI every month to pay the deferred EMIs over the next 6 months.
Since the 1st EMI after the loan moratorium shall be after 30th September 2020, you’ll have more clarity on the fate of the batch of petitions before the Supreme Court of India seeking interest waiver (Discussed below in detail in this article) by that time and you may decide for repayment accordingly.
In case you want to know an increase in EMIs & amount payable for your loan, you may CLICK HERE.
Alternatively, you may leave a message in the comment section and we’ll do it for you along with suggestions (if any).
Second: Inspect Your Loan Portfolio To Identify High-Interest Loans
If you are not able to pay EMI/amount due for all your loans, you need to identify the loans which carry a high rate of interest and try to repay EMI due for these loans first.
The unsecured loans like Credit Cards carry a very high rate of interest without you being aware of it. The interest rate could be as high as 40%-45%. In case you are having any credit card dues or any temporary unsecured loan adjust it first.
You may explore the possibility of availing a secured loan to adjust the unsecured loan as secured loans carry a lower rate of interest and in this way you can save substantial interest cost. For example, you may avail housing overdraft limit and/or Gold loan @ 8% to 9% to repay personal loans, Credit card dues, or EMI due for the moratorium period. The OD-housing and/or Gold loan can be adjusted as and when your liquidity condition improves in the future. In the case of agriculturists, availing KCC limits can be explored.
In case you want our suggestions on any particular loan you may submit your query in the comment section.
Third: Restructuring of Personal Loans (to avail further Moratorium of up to 2 years)
If you are under real stress due to job loss, salary cut, impact on business etc, then you may avail restructuring facility made available by Reserve Bank of India (RBI) communicated vide RBI circular no BP.BC/3/21.04.048/2020-21 dated 6th August 2020.
Restructuring in simple terms changes in original terms of loans like repayment schedule, EMI etc. As per RBI circular banks can allow further loan moratorium of up to 2 years. The main feature of the scheme is as under:
- The Scheme applies to Personal Loans sanctioned to an individual by lenders.
- The account of the borrower should be standard and not in default by more than 30 days as on 1st March 2020.
- The accounts of eligible borrowers shall continue to be in standard category till the invocation of the resolution plan i.e. the date on which the lender and borrowers agreed on the plan. The same shall not be later than 31st December 2020 and must be implemented within 90 days from the invocation date.
- The resolution may include rescheduling of repayment, conversion of interest due into installments, and Loan Moratorium of up to 2 years. The moratorium shall start immediately on the implementation of the resolution plan.
- The resolution plan shall be considered implemented only if all related documentation/agreements stand executed and the change in terms gets reflected in the books of the lender. Further, the borrower should not be in default as per the revised T&C of sanction.
The lending institutions are required to come up with a board-approved resolution plan in line with the above guidelines. Finance Minister Smt. Nirmala Sitharaman has directed Lenders to roll out the resolution plans for borrowers under stress by 15th September 2020.
Hence you should check with your lending institution in respect of approved resolution plan and in case the board is yet to approve a plan, be in touch with your lender.
We have added a link to the RBI circular under “Sources” below in case you need to share it with your banker to negotiate terms of loan and relaxations (if any).
Fourth: Shift your loans from MCLR to RLLR:
Check whether your loans are linked to MCLR (Marginal Cost of Funds based Lending Rate) or RLLR (Repo Linked Lending Rate) by inquiring your lender.
RBI had advised that from 1st October 2019, all new floating rate retail loan shall be linked to an external benchmark, like Reserve Bank Repo rate. After which all banks/FIs have linked fresh retail loans to RLLR and have given an option to existing borrowers to shift from MCLR linked interest rates to Repo Linked interest rates.
The Repo linked interest rates are lower than MCLR linked interest rates. Further, as the RLLR based interest rate is directly linked to Repo rate which is communicated by Reserve Bank of India, the full benefit of reduction in the Repo rate gets passed onto borrowers immediately which is not the case with MCLR linked interest rate where the discretion lies with lenders. Further MCLR of a loan is generally fixed for one year during which even if a lender decides to reduce MCLR, the borrower does not get any benefit. The same could be a losing proposition if rates are on a downward trend.
Let us understand the same with an example:
- Amount of Housing Loan – Rs. 50.00 lacs
- MCLR Interest rate : MCLR + 1.50 % (Risk Premium)
The interest rate on your loan is charged by a lender in the form of (MCLR + Risk Premium) or (RLLR + Risk Premium). The Risk premium is decided by banks based on their risk assessment of a borrower and may vary for every individual.
Let us assume present one-year MCLR is 7.50% and the loan is linked to one year MCLR. In this case, the effective rate of interest shall be 9.00% (7.50% + 1.50%)
- RLLR based interest rate for the same loan: RLLR+1.50% (Risk Premium)
Let us assume present RLLR is 7.50% (although the RLLR for all banks is less than 1-year MCLR at present). In this case, the effective rate of interest shall be 9.00% (7.50% + 1.50%)
Now, in the above scenario if RBI reduces the Repo Rate by 0.25% (i.e. 25bps) the interest on RLLR based loan shall be revised to 8.75% (9.00%-0.25%) from next month. Further, even if the lender decides to reduce MCLR by 0.20% (generally reduction in MCLR is less than the reduction in Repo rate), the interest on MCLR based loan shall not be revised before the lapse of one year from the last reset of MCLR which is normally one year.
Hence check the effective rate of your loans under MCLR & RLLR and shift the loans to RLLR if you find it beneficial.
The latest MCLR & RLLR rates of some of the leading banks are as under:
|Bank||Marginal Cost of Funds based Lending Rate (MCLR) for 1 year (%)||Repo Linked Lending Rate (RLLR) (%)|
|State Bank of India||7.00||6.25|
|Punjab National Bank||7.35||6.80|
|Bank of Baroda||7.60||7.00|
(In case you want any advice/clarification after discussion with your lender you may leave a comment below as it has come to our notice that many lenders are advising the borrowers otherwise to increase their interest income)
Fifth: Hon’ble Supreme Court’s Intervention on Loan Moratorium
Supreme Court is hearing a bunch of petitions seeking a waiver of interest during the Loan moratorium period. The petitions are filed by Individuals, Hotel Associations & Real Estate Developers, etc.
The bench of Justices R. Subhash Reddy, Ashok Bhushan & M.R. Shah while hearing the case on 03/09/2020 directed as under:
- The accounts not declared as Non-Performing Asset (NPA) as on 31st August shall not be declared as NPA by lending institutions till further orders.
- The court has asked the Reserve Bank of India to explain discretion given to banks to allow relief to borrowers under stress.
Further in the order dated 10.09.2020, the honorable court has directed to extend the loan moratorium till 28.09.2020.
The parties to the case are RBI, Government, IBA and petitioners from various backgrounds.
This is a developing story and you may visit again to know the latest updates & advise as the events unfold.
Chronology of Events in RBI Loan Moratorium
- The Nationwide lockdown for 21 days i.e. from 25th March 2020 to 14th April 2020 was imposed on 24th March 2020 by the Government of India.
- RBI vide its circular dated 27.03.2020 allowed 3 months moratorium on interest and instalments falling due between 1st March 2020 to 31st May 2020. The relevant instructions are as under:
“In respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) (“lending institutions”) are permitted to grant a moratorium of three months on payment of all installments falling due between March 1, 2020, and May 31, 2020. The repayment schedule for such loans as also the residual tenor will be shifted across the board by three months after the moratorium period. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period.”
- The lockdown was further extended to 3rd May 2020, 17th May 2020 & 31st May 2020 on various dates.
- Further RBI vides it’s circular dated 23.05.2020 extended the moratorium by another 3 months i.e. up to 31st August 2020. The relevant instructions are as under:
In view of the extension of lockdown and continuing disruption on account of COVID-19, all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, All-India Financial Institutions, and Non-banking Financial Companies (including housing finance companies) (“lending institutions”) are permitted to extend the moratorium by another three months i.e. from June 1, 2020, to August 31, 2020, on payment of all instalments in respect of term loans (including agricultural term loans, retail and crop loans). Accordingly, the repayment schedule for such loans as also the residual tenor will be shifted across the board. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period.
- The lockdown restrictions were lifted in a phased manner under the “Unlock” theme from 1st June 2020. The first phase i.e. Unlock 1 was announced on 30th May 2020 for the period up to 30th June, Unlock 2 for the period up to 31st July, Unlock 3 for the period up to 31st August 2020 and Unlock 4 for the period up to 30th September 2020.
- RBI vide its circular dated 06.08.2020 has advised resolution framework for COVID 19 related stress. The relevant instructions are as under:
“The economic fallout on account of the Covid-19 pandemic has led to significant financial stress for borrowers across the board. The resultant stress can potentially impact the long-term viability of many firms, otherwise having a good track record under the existing promoters, due to their debt burden becoming disproportionate relative to their cash flow generation abilities. Such widespread impact could impair the entire recovery process, posing significant financial stability risks.
Considering the above, with the intent to facilitate the revival of real sector activities and mitigate the impact on the ultimate borrowers, it has been decided to provide a window under the Prudential Framework to enable the lenders to implement a resolution plan in respect of eligible corporate exposures without a change in ownership, and personal loans, while classifying such exposures as Standard, subject to specified conditions”
The loan moratorium along with other measures was introduced to address genuine stress due to COVID-19 pandemic. In case you are not under real stress, the repayment of due EMIs is most beneficial as availing of moratorium shall lead to an increase in the net outflow of funds. The amount of increase in outflow shall be substantial for loans that were availed in the recent past and are at the initial stage of repayment and also which carry a high rate of interest.
In case of real stress, you should explore various options like adjusting high-interest rate loans with lower rate loans, exploring options for extension in the moratorium, reduction in the rate of interest, increase in repayment period under resolution plans.
For specific loan related queries you may leave a message in the comment section. Further, you may subscribe to our weekly newsletter to know more about personal finance.