Amidst Covid- 19, The Reserve Bank of India (RBI) came up with an equated monthly installments (EMI) moratorium plan in the month of March 2020. This decision was a gigantic relief for retail borrowers who were dented due to disrupted cash flows. A moratorium is a period when the borrower who has taken any loan from any commercial bank, co-operative or NBFC’s does not have to pay EMI, and get a relaxation to defer payments. However, it is not a waiver and these EMIs will be paid as per the new emended schedule. Initially the loan moratorium was agreed till May 2020, but later a further suspension of EMIs were extended till 31st Aug 2020.
Moratorium – Borrower’s Perspective
According to a report release by International Labour Organization in August 2020, almost 4 million jobs were lost due to Covid-19. With such a scenario, moratorium came as big rescue. The EMI moratorium arrangement was not mandatory, rather it was for those who were genuinely impacted during pandemic with no impact on credit rating during the running interest times. Now in a moratorium, a borrower does not pay interest, he defers his EMI and pays later that is fine but interest is levied upon interest that is penalizing a borrower especially during Covid-19.
Moratorium – Lender’s Perspective
Banks had to merely give moratorium to all borrowers if they opted without evaluating their metals for payments of EMIs and no eligibility criteria were set as such. As per the bank, interest on interest is routine banking practice and not a penalty. Now bank suspended interest for let’s say 1 year, the borrower may take undue advantage of the same arrangements made by bank. For e.g. pharma professional is paying an EMI of 50,000 every month, he opts in for a moratorium in spite of his having his job, so 6 months moratorium Rs 300000 he would deposit in a Fixed deposit scheme and earn interest. If every borrow deploy this strategy how is bank going to pay interest to the depositors. As per the Reserve Bank of India Stability Report, more than 50% of retail borrowers had availed benefits of moratorium. Therefore, bank is charging interest on interest to safeguard the depositors. As per the unjustified investments made by the borrower also raises question of the time value of money. For instance, if the borrower pays 300000 lakh of interest two years down the line the value of the money will diminish due to inflation and add to the losses suffered by the bank and depositors in form of low interest.

Loan Restructuring – Is it a solution to Borrowers, Lenders and Depositors?
It is at most important to maintain a good health of the lending sector and help borrowers who are facing challenge to service their existing debt. In August 2020, the reserve bank of India had set up a committee to address the issue and give recommendations. Few financial parameters as a resolution for stress during Covid-19 were recommended by a panel lead by K V Kamath. As per the recommendations most impacted 26 sectors will be evaluated based on few threshold ratios before restructuring loans. These recommendations from committee are applicable to personal loans, corporate and MSME. The residual tenure of the loan may be extended for a maximum of 2 years. Independent credit evaluation will be done by credit rating agency approved by RBI. On the other side the borrowers, be it corporate or retail needs to comprehend the long-term implication of restructuring. The borrower may benefit from flexibility of loan repayments but all restructuring plan adds to the cost of borrowers in form of higher interest so only those who are deeply impacted with loss of jobs and cash flows should opt for the same.

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