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How does the 3-Month Moratorium on Repayment of Term Loans Affect Borrowers?

By Finserv MARKETS - Apr 10,2020
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3-Month Moratorium on Repayment of Term Loans

Owing to the economic impact of the COVID-19 pandemic that’s sweeping across countries all over the world, the personal finances of a large section of the global population have been affected adversely. Earlier in March, the International Labor Organization had estimated that job losses across the world could rise by around 5.3 million to 24.7 million. A week later, the U.N. agency revealed that the number of job losses could exceed their previous estimate. This situation could very well reflect in India as well. And with the prospect of job losses or pay cuts looming in, people with debts are particularly in a vulnerable position.

To alleviate the burden on borrowers, India’s central bank recently gave permission to lenders like banks and financial institutions to allow for a moratorium on loan repayment. This recent RBI announcement can offer some much-needed financial respite to borrowers who have availed of term loans. Here’s a closer look at how this 3-month EMI holiday will affect the borrowers.

The Moratorium for COVID-19 Grants Temporary Relief from Debt Repayments

The recent RBI announcement grants borrowers a temporary relief from debt repayment for a period of 3 months, ranging from March 1, 2020 to May 31, 2020. This is a welcome move that is bound to be particularly helpful for individuals who have either suffered a reduction in their monthly salaries or earnings, or who have been affected by a complete loss of income due to COVID-19 lockdown. As a result of this moratorium on loan repayments, borrowers thus affected may be able to enjoy a temporary respite from EMI payments until they’re able to get back on their feet.

At this juncture, it needs to be noted that this EMI holiday is only a deferment of your loan repayments; it is not a waiver. So, your liability does not stand reduced. It’s only deferred by a period of 3 months, and is in no way a re-aging of your debt. Also, as per the RBI announcement, interest shall continue to accrue during this moratorium period.

This EMI Holiday Benefits Borrowers who have Availed Term Loans

As per the RBI announcement, the moratorium on loan repayment benefits borrowers of term loans. These loans include a variety of borrowing such as personal loans, vehicle loans, home loans, agricultural term loans, and crop loans. Only the term loans that were outstanding as of March 1, 2020 are eligible for this 3-month deferment.

Additionally, the following kinds of instalments are included in the moratorium.

  1. Principal and interest components of loan repayments
  2. Equated Monthly Instalments (EMIs)
  3. Bullet repayments
  4. Credit card dues

This is good news for borrowers who have availed credit facilities through credit cards as well, since they need not worry about repaying interest-clad EMIs on their cards till May 31, 2020.

The Deferment Does Not Impact your Credit Scores Adversely

Many borrowers may find themselves apprehensive about how this moratorium on loan repayment will affect their credit scores. On this front, the RBI has clarified that Credit Information Companies (CICs) and lending institutions should not treat repayments deferred during this EMI holiday as defaults. So, if you’ve postponed your installment payments by 3 months, your credit history will not be adversely affected, since this is not a re-aging of debt or a default on your part.

Re-aging of debt occurs if a borrower enters into an agreement to resume making payments on an overdue loan. This converts an old liability into a more recent debt, thereby making it evident on your credit report. This EMI moratorium, on the other hand, is merely a temporary stoppage of your liability, initiated by the bank itself. As a result, it will not bring your credit score down.

The RBI Announcement only Permits a Moratorium

While the EMI moratorium for COVID-19 is indeed a much-needed relief measure, it’s merely a permission granted by the central bank. The onus to implement the EMI holiday rests with lending institutions. In this regard, qualifying loans taken from the following categories of lenders are eligible for the moratorium.

  • Commercial banks
  • Non-banking Finance Companies (NBFCs)
  • Housing Finance Companies (HFCs)
  • Regional rural banks
  • Local area banks
  • Small finance banks

These banks and lending institutions will need to frame board-approved policies to bring this moratorium into effect. To know if your loan is eligible for EMI deferment, it’s best to contact your bank to understand their policies regarding this EMI holiday.

What Should Borrowers do During this 3-Month EMI Holiday?

The repaying capacities of many borrowers have taken a severe hit during these trying times. If you, too, have suffered loss of income, here’s what you can do during this 3-month moratorium on loan repayment.

  • Take steps to reduce other costs during COVID-19 lockdown. Some kinds of savings are already possible, since costs like fuel and transport expenses, shopping outlays, and costs of eating out are temporarily reduced.
  • Make use of the money thus saved to repay your EMIs, once the moratorium period comes to an end.
  • If you’re unable to save adequately during this EMI holiday, you may need to tap into your emergency funds or your investments to get the funds to repay your loans. Failing to repay your debt after the moratorium period could lead to penalty charges, added interest, and in the worst cases, seizure of collateral if yours is a secured loan.

If you’ve borrowed a term loan from an eligible lending institution, and if you’ve not suffered any loss of income during this nationwide lockdown, here’s what you should do.

  • If you’re eligible for deferment of EMIs as per your lender’s policies, you may still have a decent bit of money saved at the end of each month, since many everyday expenses have been temporarily minimized or eliminated. Make use of these added savings to grow your investments or your emergency fund.
  • If you wish to, you can continue making your repayments as per schedule. This ensures that you ride through the EMI holiday without any backlogs in repayment.
  • On the other hand, if you choose to make use of the moratorium on loan repayment as per the RBI announcement, you need to set aside your EMI amount each month, so you can repay it as soon as the deferment ends instead of accidentally spending it.


All things considered, this EMI holiday could certainly act as a financial immunity for borrowers during times like these, when they’re particularly vulnerable. Nevertheless, before planning your finances for this 3-month period, it’s advisable to get in touch with your bank or lender to understand whether they have policies in place to implement this moratorium. Also, if you have an auto-debit mandate in place, it’s best to retain it, since your EMIs will automatically be deferred if your bank is offering the EMI moratorium for COVID-19.

So, in a nut shell, borrowers can enjoy this 3-month respite and strengthen their finances during this EMI holiday. So, if you’ve taken a personal loan, a home loan, or even a two-wheeler loan, you get to experience the immunity offered by this RBI announcement.

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