Understanding the Benefits of Moratorium Period for Business Owners

Posted in Lending Articles By Sajhyadri Chattopadhyay-
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challenges borrowers face while taking a business loan

A moratorium period for a loan is a decided-upon time frame during which borrowers are provided a respite from having to pay loan EMIs. For example, the Reserve Bank of India had announced a moratorium for businesses that had taken loans for working capital requirements and other business activities. Additionally, this facility is applicable to diverse loan categories and allows borrowers to navigate financial challenges with a degree of flexibility. 

Deciphering the Benefits of a Loan Moratorium Period

A business loan moratorium period offers a trifecta of benefits, especially for business owners facing economic headwinds – 

Financial Relief: 

Getting a time out from paying your loan instalments for a set time can be a big relief during tough financial situations. It's like hitting the pause button, giving you time to get back on your feet before starting the payments again. 

Avoiding Extra Charges: 

Lenders tend to impose fines when you are late on EMI payments. However, during the moratorium, they don't charge any extra fees or penalties for late payments. Thus, you don't have the dark cloud of incurring additional losses from missed payments looming over your head. 

Protecting Your Credit Score: 

Your credit score could plumet after you miss an EMI payment, despite years of timely payments. But the respite offered by a moratorium ensures that your credit score is not affected from the break in EMI payments, so your ability to borrow in the future stays intact. 

Also Read: Challenges Borrowers Face While Taking a Business Loan

Understanding the Benefits of a Moratorium Period with an Example

Meet Raj, who opened a 2nd-hand two-wheeler store in Pune with a ₹10 Lakh business loan. Unfortunately, the COVID-19 pandemic struck in 2020 and turned the economy upside down. His sales hit rock bottom and Raj struggled to pay his EMIs. Thankfully, the RBI introduced a loan moratorium period of 3 months, so Raj managed to defer his EMI payments by the same duration. 

This break allowed him to reassess and adapt his business strategies. He utilised this time to stabilise his business amidst economic uncertainties and recover his financial stability. As the moratorium concluded, Raj resumed his payments and was able to repay his loan in due course. Thanks to the moratorium period, he did so without any credit score problems or penalty charges. 

Beyond Business: How Does a Moratorium Help in Other Loans?

A moratorium period for education loans is vital for students pursuing higher education in India or abroad. Government banks allow postgraduate students two years before starting loan repayments which is extended for those still seeking employment after course completion. Secured education loans enjoy a moratorium of up to course completion plus six months. 

A moratorium period acts as a similar financial breather for home loan borrowers, where lenders often provide an 18-month grace period or one-month post-possession for under construction properties. Ready-to-move-in properties have a shorter grace period of just one month. This provision offers relief to borrowers against home loan EMIs.

RBI’s Loan Moratorium for the Corona Pandemic

The Reserve Bank of India announced a three-month moratorium period from loan repayments during the corona pandemic, which was extended until August 31, 2020.  

  • Borrowers got a three-month break from loan repayment starting from March 1, 2020. This also applied to EMI payments and bullet repayments on personal loans, home loans, education loans, credit cards, etc. 

  • Banks were also encouraged to change loan terms for those struggling because of job loss, business troubles, or other issues from the pandemic. 

  • The Supreme Court directed lenders to stop charging compound interest during this period. 

  • Banks that collected compound interest on loans were given the choice of refunding the amount to the accountholders or adjusting it in future instalments.

How Was This Beneficial to Borrowers?

RBI’s six-month loan moratorium from March 1 to August 31, 2020, came at a cost of ₹6,474 Crores to the Indian Government. However, its benefits were far-reaching, extending to over 19 crores borrowers across the country. 

This financial buffer was because the government covered the difference between borrowers’ compound and simple interest during this 6-month period. The Ministry of Finance explained the actual impact of this intervention in a parliamentary response on 25th July 2022.  

 

A loan moratorium acts like a helping hand, allowing borrowers time to take stock of their financial plans with a pause on paying EMIs without harming their credit scores. People facing trouble repaying their loans can opt for a balance transfer facility on Bajaj Markets and benefit from more affordable interest rates. Simply choose your preferred lender on the platform and get an additional top up amount when you apply. 

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