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The government told the Supreme Court on Tuesday that the moratorium for repayment of loans allowed during the lockdown can be extended by up to two years, as per a 6 August circular by the Reserve Bank of India. In the wake of the Covid-19 crisis, the Reserve Bank of India (RBI) had allowed banks and other financial institutions to offer a six-month moratorium to all retail and corporate loan borrowers until August 31, 2020. 

“We are in the process of identifying the distressed sectors to vary benefits according to the impact of the hit they have taken”, said Solicitor General Tushar Mehta, representing the Centre. 

The loan includes all sorts of retail loans, such as personal loans, home loans, auto loans, agricultural loans and crop loans. The RBI stated that credit card dues will qualify for the moratorium. 

During the moratorium period, borrowers can choose not to make monthly payments on their loans without having to pay penal charges. A moratorium is not a concession, but a deferment of payment to provide some relief to borrowers experiencing a financial crunch.

The Supreme Court pulled up the Centre for not filing an affidavit in time with regard to its position to waive interest rates on loans entirely, or the interest accrued during the moratorium period. 

The government clarified its position under DMA. The Solicitor General also informed the court that they were having a discussion with the central bank and the bankers’ association about interest waiver on loan dues during the moratorium period.

“Senior advocate Harish Salve has also spoken to associations of bankers and most issues have been resolved," Mehta said.

The central bank of India had informed the court earlier that waiving interest on term loans would risk the financial health and stability of the banks. 

What is a moratorium period?

A moratorium period is basically a time during the loan term when a borrower can skip any repayment without incurring penal charges. In other words, a loan borrower is not required to make any payment. After the coronavirus outbreak, the Reserve Bank of India offered a moratorium on all types of loans to reduce the financial burden on individuals experiencing a shortage of money for their daily expenses. Borrowers can start repaying their EMI after a break as stated by their banks. 

What are the benefits of a moratorium period?

Moratorium period gives the personal loan, home loan, auto loan, etc. borrowers ample time to plan their finances. During this time, you can learn to adjust your expenses according to your income, taking your loan into consideration. You can pay your other important expenses such as medical bills, grocery bills, or simply you can save money for your subsequent EMIs. Additionally, a moratorium period benefits you if you have lost your job or you are looking to change your job.  

If the moratorium period is extended for up to 2 years, it will be a big relief for individuals who are experiencing an extreme shortage of money due to the Covid-19 inflicted economic disaster. 

Please note: If interest is not waived during the moratorium period, taking moratorium may be counterintuitive. Because you will have to pay extra interest on the overall loan amount. So, if you have sufficient money, you must repay the loan on time and not fall for the temptation of the unnecessary moratorium.

Conclusion

RBI had extended the moratorium on term loans on 22 May till 31 August in the view of the back to back lockdowns to control the spread of coronavirus. As per the 27 March RBI circular, lenders were allowed to offer a moratorium of three months for all term loan payments that were due between 1 March and 31 May. 

Please also read: Centre Proposes to Waive Compound Interest During Moratorium