What is EMI Holiday / Moratorium

Covid-19 global tragedy has pushed the Government to announce an EMI Holiday for all those who have taken a loan, but it is better to understand various aspects of this EMI Holiday before opting for it.

What is a Moratorium or EMI Holiday?

A moratorium period is a period during a loan term when the borrower is not obligated to make a payment. It is a waiting period before the borrower (again) starts making fixed monthly payments.

Why is Moratorium offered?

It is offered under special circumstances or as a part of the agreement during signing for a loan term. It is also offered to help individuals facing temporary financial difficulties to plan their finances better.

For Covid-19, the RBI has offered a 3 month EMI Holiday on account of the global lock down because of Covid-19 virus.

Impact of EMI Holiday (for the buyer)

1/ EMI repayments of loans taken would not be deducted from their bank accounts till the moratorium period is over. The loan EMI payments will restart only once the moratorium time period expires.

2/ Credit Score of the buyer will not be impacted in this EMI Holiday period. However, it is the prerogative of the buyer to stay on top of it by checking your credit score regularly during the moratorium period.

3/ No change in the existing terms and conditions of the loan, unless there are specific existing terms and conditions of the loan contain conditions/charges related to a moratorium.

4/ Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period, which means that the EMI holiday does not come for free.

5/ Once the EMI Holiday is over, the loan tenure term is usually extended by the duration of the holiday.

Features of EMI Holiday (for the lender / Bank or NBFC)

1/ No affect on the risk classification of the loan i.e. the loan is not considered as a Non-Performing Asset (NPA) for the Holiday period.

2/ All commercial banks, co-operative banks, Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) are usually permitted to allow a moratorium.

3/ Banks have to get an approval from their respective boards to implement the moratorium policy. Therefore decision on offering a moratorium is actually up to the lending institution. Therefore, it is very important that the borrowers should get clarity from their lending institutions on how this moratorium, when and if offered, will work for them.

Lending Institutions decide how moratorium gets operationalised
The final decision on operational aspects of the moratorium is left to the lender. 

As an example, in case of Covid-19, I see two different operational implementations:

1/ State Bank Of India (SBI) has mandated this moratorium for all its retail customers, which means they have no choice in terms of continuing the EMIs or not. Everyone goes on an EMI Holiday for 3 months.
2/ On the other hand, Yes Bank has offered the option to the retail client in case the buyer wants to go for the moratorium. By default, no moratorium is offered.

One needs to check with the lender whenever any such EMI Holiday is offered.

What kind of Loan EMIs are included in the EMI Holiday?

Usually, EMI Holidays are applicable on all term loans i.e. those that have a fixed tenure / amount. A few examples are as given below:

1/ Credit card dues

2/ Home Loans

3/ Loan against Property

4/ Vehicle Loan

5/ Personal Loan

6/ Education Loan

7/ Consumer durable loans, such as EMIs on mobiles, fridge, TV etc

In case of Coivd-19 EMI Holiday, this holiday is applicable only on Retail loans and not  on Business Loans.

Summary

While moratoriums like these are good since they allow us to pass through a difficult phase, they do not come free. You continue to pay interest in the holiday period, and therefore end up paying higher than the planned interest. It all depends on your situation. If you can afford it and the situation is manageable, then you need not opt for the Holiday.

Regards

Manoj AroraOfficial Website