Loan Moratorium: SC Directs Centre To Submit Action Plan By November 2

The Supreme Court has given more time, yet again, to the centre to submit 'an appropriate action plan'.  Regarding the waiver of compound interest on loans, the SC has allowed the centre's plan of waiving compound interest charged on loans of up to Rs 2 crores for the six-month moratorium period.  The next hearing is scheduled for November 2, 2020. 

A three-judge SC bench, headed by justice Ashok Bhushan, noted that the centre’s affidavit had not apprised the bench about measures for various sectors, as per the recommendations in the KV Kamath Committee's report on September 7, 2020.  More so, the centre was also silent on the steps taken to implement its own decisions.

With the COVID-19 pandemic affecting economies across the globe, many countries have announced measures to combat its economic fallout. In India, RBI governor Shaktikanta Das permitted all lending institutions to allow a moratorium of three months on payment of all term loans outstanding as on March 1, 2020. This was extended by another three months until August 31, 2020, with a view to provide relief to those businesses and individuals that suffered due to unprecedented revenue disruptions.

On September 10, 2020 the Supreme Court of India (SC) said that it will hear the matter and pronounce an interim order on September 28, 2020. This timeline was further pushed. Meanwhile, the apex court also granted the centre, RBI, and banks two weeks time to file a reply on their point of view on waiving of interest charged during the moratorium period. 

Earlier, the leading bankers, which includes PNB MD and CEO SS Mallikarjuna Rao, HDFC Chairman Deepak Parekh, SBI Chairman Rajnish Kumar and CII President Uday Kotak, have suggested that the moratorium need not be extended beyond August 31, 2020, because the economy has been reviving and many were in a position to pay their EMIs. Keeping this in view, a lawyer has moved the Supreme Court of India, seeking a direction to the RBI, to extend the moratorium till the end of the year.

As per the SC hearing on the matter on August 26, 2020, the bench led by justice Ashok Bhushan directed the centre to clarify its opinion in the matter of interest waiver and file a response. The Finance Ministry is of the opinion that interest waivers would not be a sound idea and a more long-term solution should be identified.

On September 1, 2020, the apex court directed banks not to tag any loan that was standard up to August 31, 2020, as a non-performing asset (NPA), until further notice. 

The RBI has also provided a facility for restructuring of loans, where the moratorium can be extended by two years. However, there are some conditions:

• You will have to provide proof of your incapacity to repay the loan. Proofs include job termination, salary cuts, business losses, etc.
• The loan should not have been overdue by more than 30 days as on March 1, 2020. 
• You can avail of the facility even if you did not opt for the moratorium facility.

Borrowers who were genuinely hit due by the economic pressures caused due to COVID-19, should consider the restructuring facility. It does not affect your credit score.

Earlier in August 2020, Finway, a non-banking financial institution had conducted a research and studied that across India, 45 per cent of borrowers had availed of the moratorium facility. Most of them were middle-aged. Delhi-NCR has seen the maximum number of people opting for the temporary relief. Eventually, the demand for loans also saw a downturn, notes Finway. Thus, there are a number of people in favour of extending the moratorium.

Read on to know what is a moratorium, how it works, its pros and cons and how it has worked for many over the last six months.

What is a moratorium?

Moratorium is not a new concept. Under-construction projects often saw homebuyers asking for a moratorium period on home loans, while the same was sometimes also available on ready-to-move-in properties, on a case-to-case basis. Owing to the Coronavirus and the lockdown, the RBI anticipated that several businesses and companies may struggle, due to the disruption. Consequently, individuals suffering due to delayed salaries or business slowdown, may find themselves unable to repay debts. With the RBI permitting banks to allow the moratorium facility, individuals having to pay EMIs can put it on hold for six months, between March 1, 2020 and August 31, 2020. They can put their liquid money into avenues that need to be attended to immediately. 

The RBI's moratorium allows you to defer your EMI payments by a period of three months and this was subsequently extended to six months. This should not be mistaken for a waiver. If your instalments were due in this period, the RBI has now permitted your bank to allow you to postpone the repayment.

How will the RBI’s moratorium impact EMIs

You will be paying more as interest, if you choose to avail of the moratorium. Let us see how this works. Suppose you had taken a home loan of Rs 65 lakh at 9.30% interest for a period of 20 years from Canara Bank. The monthly installment in this case comes to Rs 59,750. The total interest payable is Rs 78.38 lakh. In case you choose to take the moratorium of three months, the interest will continue to accrue which comes to Rs 1,52,299. This will be added to your overall liability. Hence, the total interest amount payable will now be Rs 80.21 lakh.

Most borrowers give the Electronic Clearing Service (ECS) mandate for the first week of a month. Therefore, for many, an EMI that was due in March 2020, would already have been paid. For such borrowers, the EMIs can be deferred by two months only, that is, for April and May, 2020. Some banks may allow you to ask for a refund, if the EMI outgo was on or after March 27, 2020. Check with your bank for this facility. 

Will the home loan moratorium affect credit score?

Under regular circumstances, defaulting on your EMIs will cost you and it will affect your credit score. The RBI-permitted moratorium will not impact your credit score. However, defaults after August 31, 2020, will be reported to credit information companies /credit bureau.

Bank guidelines for RBI moratorium on EMIs

State Bank of India (SBI), HDFC Bank, ICICI Bank, IDBI Bank, Canara Bank, Andhra Bank, UCO Bank, Indian Bank, Syndicate Bank, Indian Overseas Bank, Bank of Baroda, Central Bank of India, Oriental Bank of Commerce, Punjab National Bank, Bank of India, Allahabad Bank, Union Bank of India and Corporation Bank, are some of the banks that have allowed their customers to avail of the moratorium. Each bank has notified its guidelines on their official websites, Twitter handle or through mails and SMS. Note that some banks may want you to indicate whether or not you wish to avail of the facility. Other banks have given the moratorium as a default option and as a payee, you will need to opt-in or opt-out of the facility, manually. Make sure you do this ahead of the deadline.

All lending institutions that is all commercial banks, including regional rural banks, small finance banks and local area banks, co-operative banks, all-India financial institutions and NBFCs, including housing finance companies, have been permitted to offer the moratorium.

Should you avail of the home loan EMI moratorium?

If your finances are not disturbed and you do not anticipate any disruption in your salary flow, it is wiser to keep repaying the loans. Deferring your EMIs will only result in a higher interest burden. On the other hand, if you have been severely impacted by the Coronavirus pandemic and your business has suffered, it is understandable that continuing to pay your EMIs, which in the case of a home loan is a significant amount, can put you under tremendous pressure. In such a case, a higher interest is a small price to pay in the face of short-term struggle and uncertainty.