Explained: Moratorium on Loans

What is Moratorium

• Moratorium here meant that the borrower can choose not to pay Interest and Principal due for the time decided. Payments are deferred.
• RBI has allowed Banks and NBFCs to offer Moratorium to all Term loans. Term loans here will include all kinds of retail loans such as vehicle loan, home loan,Credit card and personal loan, agricultural term loans as well as crop loans.
• Interest and Principal has not been foregone but has been postponed in a way.

Moratorium & Credit Score:

• A Credit score is a number lenders use to help them decide how likely it is that the Borrower will be repaid on time. It is based on Credit History (Repayment History) of borrowers.
• If a borrower cannot pay interest and principal on time then its credit score is affected.
• RBI has also announced that anyone who avails Moratorium will not see its credit score affected.

Why was Moratorium required:

• Due to Covid lockdown, many businesses and individuals have seen their sales and incomes almost coming to an halt. This would result in a cash flow mismatch where for a temporary period they might not have the cash to pay their interest and principal due on their loans.
• This might force a lot of Business and Individual loans to become bad. These loans in a normal situation would have been good.
• This can result in a contagion effect in the economy and cause systemic issues. One business failing can lead to other businesses failing further slowing the economic growth and creating a domino effect.

Fear of Increased Stress and Non Performing Assets:

• There are concerns that with the economy slowing down, there will be a rise in Stressed and non performing loans.
• Analysts are closely tracking the amount of Loan book with Banks and NBFC which have opted for a Moratorium.
• Because there is an increased probability that many of these businesses will not be able to make a comeback post the lockdown is lifted and their loans might become bad.

Moratorium has been extended twice covering a total of six months period now, i.e. from March 2020 until August 2020.

Get one such article delivered every day on Whatsapp. Subscribe at bit.ly/finixschool