What does 3 month Moratorium on Loans mean?

At the outset, it is essential to understand that 3 month loan repayment moratorium announced by the regulator, RBI, is not a waiver of installments, nor interest waiver but just a grace period that will defer repayment by 3 months but interest at applicable rate would continued to be charged on the outstanding. In other words, non-payment of 2-3 installments during moratorium period would not tantamount to default rather missing installments would enhance the tenure of the loan or EMI would get increased commensurately.

Scenario I: The borrower opts to pay interest for the moratorium period in July 2020 i.e. after moratorium period is over.

Scenario II: The interest applied during moratorium period gets added to the outstanding period that would result in enhancement of EMI for the balance period of loan.

Scenario III: There is an option of keeping EMI unchanged but loan period gets extended depending upon the leftover period of the loan. The longer the balance period the impact would be larger.

While home and car loan borrowers, depending upon liquidity, consider deferring installments but credit card holders are not advised to defer repayment of credit card bill.

Consider a borrower availing a home loan of Rs 10,00,000/- at 9% for 240 months. The EMI comes to Rs 8,997/-. If borrower intends to skip payment of 2 months i.e. April and May, then following table depicts the effect of EMI deferment.

Credit Card: Assuming one makes a purchase of Rs 20,000/- on 25th March. The Credit Card bill gets generated on 10th April, with total amount due of Rs 20,000/- payable by 25th April 2020. If one opts for the moratorium, one will have accrued total interest + GST of Rs 3,478/- (assuming interest rate of 3.5% per month). The total amount of Rs 23,478/- will appear in the statement on 10th July 2020, provided there are no other transactions during intervening period. Therefore, one opting for 3 months moratorium then ends up paying exorbitant interest @5.8% per month inclusive of GST. It is not advisable to opt for moratorium by Credit Card holders.