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RBI allows a three (3) month moratorium on EMI installments of all term loans: Eligible borrowers at ease.

Owing to the financial crisis triggered in the country today, due to the Coronavirus (Covid-19) pandemic, the RBI on the 27th of March 2020, released a ‘statement on development and regulatory policies’ inter alia permitting all the financial institutions to permit a three (3) month moratorium for all the term loansand interest on workingcapital facilities.

Now, moratorium basically refers to the tenure during which the borrower does not have to repay any EMI in respect of the loan taken. The three (3) month moratorium which has been allowed by the RBI implies that the borrowers will not be required to pay any due EMI installments in respect of the term loansduring this period.

Under the usual circumstances if there is any kind of refection of the loan repayment being deferred, it hampers the borrower’s credit history and also has a negative impact on the asset book. A single default on EMI adversely impacts the credit score of the borrower and are at risk of actions taken by banks.

The Reserve Bank of India by a formal announcement permitted all banks and financial institutions, which include commercial banks like regional, rural and local area banks along with the NBFC’s to allow a moratorium period of three monthson payment of all installments falling due between March 1, 2020 and May 31, 2020. The installments will include the following payments falling due from March 1, 2020 to May 31, 2020 : (i) principal and /or interest components (ii) bullet repayments (iii) equated monthly installments (iv)credit card dues.

The repayment schedule for such loans as also the residual tenor, will be shifted across by three months after the moratorium period and the lending institutions will have to organize an approved board policy for the same.However, interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period.

It can be concluded that this moratorium is being provided in order to enable the borrowers to sustain themselves during the current financial debacle.The moratorium covers under its ambit ‘term loans’ which include home, educational and personal loans as well as agricultural, retail and crop loans or any loans having a fixed tenure.

However, experts say, this is not a blanket ban by the RBI on instalments of term loans. It is at the discretion of the lenders to implement this.Lending institutions shall frame Board approved polices for providing the above mentioned reliefs to all eligible borrowers, inter alia, including the objective criteria for considering reliefs.

Thus, it could be said that it is completely upto the discretion of the individual lending institution as to whether they should offer a moratorium or not. Customers should gather all the necessary details and clarification from their respective lending institution with regard to the manner in which this moratorium is granted, how will it work and incur benefit to them, if any.

In respect of working capital facilities sanctioned in the form of cash credit/overdraft (“CC/OD”), lending institutions are permitted to defer the recovery of interest applied in respect of all such facilities during the period from March 1, 2020 upto May 31, 2020 (“deferment”). The accumulated accrued interest shall be recovered immediately after the completion of this period.

The rescheduling of payments, including interest, will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies (CICs) by the lending institutions. CICs shall ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries.

It can be implied that this moratorium has been granted mainly to provide relief to the ordinary working class as it is a huge burden on them to pay their monthly EMI’ s especially when the economy is facing a severe financial crunch because of the Covid-19.Hence, the same will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade.

Finance Minister Nirmala Sitharaman said “Appreciate RBI Governor’s reassuring words on financial stability. The Three (3) month moratorium on payments of term loan instalments (EMI) and interest on working capital give much-desired relief.”

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