Finance

4 March 2023

The coronavirus pandemic hit economies worldwide, and regulatory authorities like the Reserve Bank of India recognized the hardships that borrowers might be facing in repayment of loans in times of such uncertainty. Hence, as a relief measure, the RBI introduced EMI moratoriums on all term loans in March 2020. This was for a duration of three months, that is, till 31st May 2020. However, this moratorium was further extended for three additional months, stretching is to 31st August 2020. This move by the RBI was intended to provide borrowers with some relief amid the Covid-19 pandemic. In October 2020, the Supreme Court got involved, and the matter underwent fairly new interpretations and changes, with many asking what really the RBI moratorium meant for borrowers.

Here’s all you need to know: 

About the moratorium on loan EMIs

In March 2020, the RBI offered a loan moratorium of three months initially, till 31st May 2020, to help borrowers tide over the financial struggles they faced due to the coronavirus pandemic. This was valid on equated monthly installments (EMIs) and was further extended to 31st August 2020. This moratorium was valid for all loans, which included education loans, home loans, personal loans, and credit card dues. 

During this moratorium period, borrowers were not required to pay the standard EMIs on their loans. This measure was aimed at giving borrowers more time to clear payments of EMIs without being classified as non-performing assets (NPAs), amid the grave economic repercussions of the lockdown. 

Eligibility criteria

The circular released by the Reserve Bank of India, dated 27th March 2020, declared that all individual borrowers were eligible to apply for the loan moratorium. This was valid for EMIs whose loans were outstanding as of 1st March 2020. 

How does it work?

The entire process was aimed towards providing borrowers with relief amid the adverse financial implications of the pandemic. Anyone who had opted for this moratorium was not required to pay EMIs during the said period. However, the interest was not waived off and would continue to accrue on the outstanding amount. 

This meant that borrowers had to pay additional interest on months covered in the moratorium on EMIs either by increasing the installment amount or by increasing the tenure of the loan. The RBI, however, assured borrowers in its circular that opting for the same would not negatively impact their credit scores or lead to credit downgrading. 

What does it mean for lenders?

Lenders such as commercial banks, including rural banks, local area banks, and small finance banks, NBFCs, all-India banks, and co-operative banks were permitted to allow the moratorium on EMI loans. In its annual report, the central bank reported that a moratorium on loan repayments would have an impact on the financial health of banks. This was after the SC issued a statement in support of borrowers, which said that ‘there is no merit charging interest on interest’. 

On June 4, 2020, the RBI said that lenders might lose up to Rs. 2 lakh crore if interest was waived off for the moratorium period. To tackle this problem, on 2nd October 2020, the central government told the SC that it would waive off compound interest on loan repayments of up to Rs. 2 crores, a move that was aimed at providing relief to MSME and individual borrowers. 

On 5th October 2020, the apex court granted the government and the RBI to file additional affidavits, the hearing was scheduled for the next day.

The hearing on 14th October 2020 concluded with RBI clarifying that only standard loan accounts as of 1st March 2020 could be recast under the moratorium. This means that: 

• If a loan account that was due for over 30 days as of 1st March 2020 but got regularised, it would not be eligible or valid for the Covid-19 resolution framework. 
• Hence, the restructuring framework is only applicable to eligible borrowers who were categorized as standard as of 1st March 2020. 
• The Reserve Bank of India also agreed to waive off the ‘interest on interest’ or compound interest. This was to be charged on loans of up to INR 2 crore for the 6 month moratorium period announced at the beginning of the coronavirus wave. 
• Moreover, the apex court also asked the government to implement this decision of waiving off the compound interest without delay and has asked the Centre to return with an appropriate action plan on 2nd November 2020. The government has addressed SC’s concern of possible implementation delays and given an outer limit extending to 15th November 2020 for the same. 

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