Perhaps for the first time in several years, the RBI has allowed a 3-month moratorium on all term loans. Here's a cheat sheet on what gets covered and what doesn't.
What's a moratorium?
In financial literature, a moratorium implies a temporary suspension of payment of interest or principal or both by borrowers or lenders during financial distress. The government or the central bank can exercise special powers and impose limits for a temporary period. The moratorium will be lifted after overcoming the financial hardships. The most recent instance of a moratorium includes Yes Bank, where the government barred the bank from lending money besides capping depositor withdrawals.
What does the RBI's 3-month moratorium cover?
All term loans including agricultural term loans, retail loans like home and auto loans, consumer durable loans on mobiles, and television sets, education loans and crop loans given by all banks, all-India Financial Institutions, and NBFCs, including housing finance companies will come under the 3-month moratorium window. The equated monthly instalments due between March 1 and May 31 will now be rescheduled to June.
Will it attract penalty?
There won't be any penalty for late payments up to June. However, interest will continue to accrue on the outstanding portion of the term loans during the moratorium period.
Does the moratorium affect all loans automatically?
According to the RBI, banks will have to frame board-approved policies to provide relief to all eligible borrowers. While the SBI said all loan repayments stand cancelled, banks may come up with directions in the coming days on how they will go about it. Whether the moratorium covers all customers by default or if it'll be a need-based deferral will be determined by individual banks. Borrowers should get in touch with respective lenders for clarity.
Is this a one-time waiver?
No. This is only delaying payment of monthly EMIs by three months. It means that after June, repayments will commence as usual. However, it's unclear if pending dues of March and May will need to be paid at once or if it'll be a monthly outgo. Individual banks are expected to issue clear directions in this regard.
What happens to your credit score?
The 3-month delay won't impact your credit score as long as you honour payments after June, when repayment terms re-commence.
Does the moratorium cover credit card payments?
Yes. Since credit cards are defined as revolving credit and not term loans, credit card dues are also covered under the moratorium. However, RBI isn't explicit about loans taken on credit cards and if those payments along with interest are eligible for the 3-month deferral.
What's in it for businesses?
All working capital loans sanctioned in the form of cash credit or overdraft facility by all lending institutions are permitted under the 3-month moratorium. It'll be applicable for interest payments due between March, 1 and May, 31. The accumulated accrued interest shall be recovered immediately after the completion of the moratorium. While this won't alter the terms and conditions of loan agreements, it will not result in asset classification downgrade either affecting the credit profiles of borrowers.