The financial sector has been one close to the heart for India since it has made a lot of money for many investors. As India is a developing country, the financial sector plays a pivotal role in the growth of the economy.
On the 27th of March, 2020, the Reserve Bank of India (RBI) announced that borrowers could hence avail a moratorium of three EMIs due between the months of March and May 2020. Applicable to various categories of loans, including personal loans, the moratorium was further extended by another three months which ended on 31st August, 2020.
Before the amendment in March 2020, Bank Nifty was at its peak of 32,400 only to swoop down to 17,100 in merely 3 months. Only the next two quarters will challenge the fundamentals for Banks and Non-Banking Financial Companies (NBFCs). One of the biggest factors that can impact their stocks is Non-Performing Assets (NPAs). NPAs are one of the vital aspects that define the quality of any financial institution; a Bank or NBFC with low NPAs demands a premium in the stock market.
Now, we are in an unprecedented situation with the COVID-19 pandemic. It has inevitably affected businesses across the globe. A minimum of 40 lakh Indians have lost their jobs due to the lockdown, while lakhs of others have been prone to pay-cuts. Loans have now turned out to be a huge burden on many.
What is a Moratorium?
A moratorium is a temporary halt of business as usual, or a suspension of some law or regulation. Most of the time, moratoriums are intended to alleviate short-term financial hardship or provide time to resolve related issues. In bankruptcy law, a moratorium is a legally-mandated hiatus in debt collection from creditors.
A moratorium is often, though not always, a response to a short-term crisis that disrupts the normal routine of a business. For instance, in the immediate aftermath of a natural disaster like an earthquake or flood, an emergency moratorium on some financial activities may be granted by a government. It will subsequently be lifted when normal business can commence once again.
If a company is experiencing financial difficulties, it can place a moratorium on certain activities to lower costs. The business may institute a hiring freeze, limit discretionary spending, or cut back on company travel and other non-essential training. Moratoriums of this nature, designed solely to reduce unnecessary spending, are not for interrupting a business’s ability or intent to repay its debts or to meet all necessary operational costs. Instead, they are taken to alleviate a financial shortfall or avoid default on debt obligations. The voluntary moratorium is a vehicle to bring spending back in line with current company revenues.
So, what is a loan moratorium?
Since there was a huge impact on salaries, so were capabilities to repay. Failing to pay EMIs would have had an effect on the credit scores by forcing lenders to classify their loans as NPA (Non-Performing Assets). To temporarily solve the problem, a relief or loan moratorium of six months was provided. This would let borrowers defer loan repayments by six months without their loans becoming NPAs. However, your loan keeps accumulating interest.
What happened in the latest discussion by the RBI?
As the EMI moratorium period was long gone, there was further discussion on extending benefits to borrowers. This is because the economy is still in disastrous shape and people are facing never-ending financial constraints. The earlier moratorium facility could’ve been availed by anyone regardless of the lockdown’s effect on their finances. However, now, a restructuring option has been made available for the genuinely affected citizens.
What’s advisable?
If you have been facing a monetary crunch due to the lockdown and are finding it very tough to repay your debts, you should opt for the restructuring. Do remember that this will be reported to CIBIL. However, it won’t affect your credit score as bad as an NPA would.
Facilities like EMI moratorium have been made available in our best interests. Rest assured and avail them as long as you take an informed and prudent decision. We at Finin help you save up enough money so you will reduce taking such loans in the future or are able to pay at least the deposit without having to bank on someone else. If you’d like to learn to manage your finances better, Finin can definitely help you!
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