Amid the lockdown caused by the COVID-19 outbreak, the Reserve Bank of India has permitted banks to allow a moratorium of three months on the payment of instalments for all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenure for such loans, may be moved forward across the board by three months.
However, the decision on the rescheduling of home, auto, and other loans will finally be taken and conveyed to customers by individual banks. Banks will continue to charge interest on the outstanding portion of the terms loans during the moratorium period. The RBI has left it to the boards of banks to put in place an objective criteria to offer moratorium to its customers.
A moratorium is not a loan waiver and does not offer any discount on interest payout. But it provides stressed customers extra time to repay without their accounts being labelled non-performing assets (NPA) or their credit score being affected.
Who can avail of these benefits?
Individuals and companies who have availed term loans — such as home loans, car loans, corporate loans — can benefit from this move. Therefore, any temporary disruption in their income or cash flows caused by the lockdown will not affect their repayment schedule for the next three months, at least.
Moratorium facility is now available on terms loans extended by all commercial banks — including regional rural banks, small finance banks and local area banks, co-operative banks, all-India Financial Institutions.
Even term loans extended by Non Banking Finance Companies, including housing finance companies and micro finance institutions, will benefit from the move.
A head of a leading housing finance company said “The RBI announcement covers all retail, non-corporate loans, across all the categories.”
What does moratorium cover?
The moratorium will be applicable on both principal and interest. The proportion of principal will depend upon the age of the loan, whether it’s the first EMI for a customer or, say, 100th EMI. During the life of a loan, the amount of interest decreases while the principal component increases as the loan amortisation progresses.
What are benefits for the customer?
This basically means that non payment during the next three months will not affect the credit history of the customers and their accounts will not be tagged as Non Performing Assets (NPAs).
This is a major relief to borrowers as loan accounts turning into NPAs can subject them to recovery actions by the banks and lending institutions.
How do companies benefit?
For corporate India too, this is a big relief, especially for those companies that have low reserves. As cash flows get impacted across the board for companies, many of them may not have the ability to repay, as the businesses have shut down completely.
This will provide them with some breathing space.
What about banks?
For banks and lending institutions, this will affect their cash flows as they may not be getting repayments for three months. But the RBI has reduced their cash reserve ratio (CRR) requirements, providing them additional liquidity.
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Are the measures expected to lift the economy?
While the decisions by RBI have been taken to protect individuals and businesses from the negative impact of the virus and the lockdown on the economy, experts feel that if these measures are complemented by further fiscal stimulus measures by the central and state governments to support demand in the economy, then it will help credit off-take.
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