Extension in moratorium on term loan instalments has provided a major relief to borrowers and companies facing cash flow problems, resulting from reduction in income or no income due to job losses.
This helps them get some extra time for repayment even as their loan accounts continue to remain standard and their credit score is not adversely affected, thanks to the regulatory relaxations provided by the Reserve Bank of India.
For leveraged companies facing the cash crunch, the moratorium provides survival time.
The expectation among the regulators and the banking fraternity is that once the lockdown eases fully in due course, economic activity will come back on track, enabling restoration of income levels of people affected by the sudden stall.
Individuals and companies who have availed term loans — such as home loans, car loans, corporate loans and credit card loans — can avail or seek extension of moratorium facility.
According to data provided by different banks, nearly 30 per cent of their outstanding loans have come under moratorium so far, with micro-finance borrowers facing extreme stress, followed by automobile finance, MSMEs, corporate and retail loans.
Banks expect more people to opt for moratorium facility as sectors such as aviation, tourism, hospitality, transportation and start-ups have seen not just salary cuts but also layoffs.
While the Indian economy is expected to experience a significant contraction this year, any revival in economic activity is seen to be a long-drawn process.
The impact of availing loan extension varies widely across borrowers.
For someone in the initial years of loan tenure and availing moratorium, his interest payout to the bank and tenure of the loan will extend significantly, as the additional interest for six months has to be paid on a higher base.
For a borrower whose loan was taken some years ago and has been repaid significantly, the extra interest payment will be relatively smaller, resulting in a lower extension of the EMI schedule.
One thing to always keep in mind is moratorium is not a loan waiver, it does not provide any monetary relief or concession in interest costs. Interest will continue to accrue on the outstanding portion of the loan during the moratorium period.