The COVID-19 pandemic and the resulting lockdowns have disrupted livelihoods across the globe, including in India. Many borrowers experienced a sharp fall in income, making it difficult or impossible to continue timely loan repayments. To provide temporary relief, the Reserve Bank of India (RBI) introduced a three-month moratorium on term loan repayments for March–May 2020, and then extended it for another three months covering June–August 2020. Because this relief is temporary, borrowers should understand the key aspects of the RBI loan repayment moratorium before deciding whether to opt in.
Applicability of the Moratorium
The RBI moratorium applied to borrowers of all term loans—home loans, personal loans, car loans, and similar facilities—sanctioned before 1 April 2020. If you opted in when the scheme began, you could avoid EMI payments for up to six months, from 1 March 2020 through 31 August 2020. At the end of the moratorium period, regular EMI payments will resume.
You could apply for the moratorium even if you had multiple loans with the same lender or with different lenders. However, granting the moratorium is ultimately at the lender’s discretion. Some banks and NBFCs required that a loan account be up to date—without missed payments through 29 February 2020—to qualify for the moratorium.
Moratorium Impact on Credit Score
The RBI clarified that EMIs missed during an approved moratorium period should not affect a borrower’s credit score. Lenders confirmed they would not report missed payments as defaults to credit bureaus for the duration of an approved moratorium. They also indicated they would not charge late payment fees or penal interest on amounts due during that period.
Interest Accrual Consideration
While not making EMIs can provide immediate cash relief, interest continues to accrue on the outstanding principal during the moratorium. This means the loan balance can grow because unpaid interest is typically added to the principal, increasing future interest liability. You can find your outstanding principal in your latest loan statement or estimate it using a loan amortization or EMI calculator based on your original loan amount, start date, and interest rate.
For example, if your outstanding principal at the start of the moratorium is Rs. 100,000 and the annual interest rate is 12%, the nominal monthly interest rate is 1% (12%/12). Interest accrues as follows:
Month 1 interest = Rs. 100,000 x 1% = Rs. 1,000.
Month 2 interest is calculated on the new principal (Rs. 100,000 + Rs. 1,000) x 1% = Rs. 1,010, and so on. Using the same approach across the moratorium months yields cumulative interest amounts approximately as follows:
| Total interest for 1 month of moratorium | Rs. 1,000 |
| Total interest for 2 months of moratorium | Rs. 2,010 |
| Total interest for 3 months of moratorium | Rs. 3,030 |
| Total interest for 4 months of moratorium | Rs. 4,060 |
| Total interest for 5 months of moratorium | Rs. 5,101 |
| Total interest for 6 months of moratorium | Rs. 6,152 |
In this illustration, the borrower would incur an additional Rs. 6,152 in interest over six months. If your outstanding principal or interest rate is higher, the accrued interest will be larger. So, while lenders did not charge late fees or penal interest during an approved moratorium, borrowers still faced the additional cost of accumulated interest.
Recommended Approach
Financial advisors generally recommended using the moratorium only if necessary. If your cash flow was stable and you could continue EMIs without hardship, it made sense to keep paying and avoid the extra interest burden. Conversely, if you lacked the means to meet EMIs during the crisis, the moratorium provided critical short-term relief and breathing room to address immediate financial challenges, albeit at the cost of higher interest over time.
The right decision depends on individual circumstances: evaluate your current cash flow, future income prospects, and the additional interest cost before opting for the moratorium. If you need guidance on loans or managing credit, reach out to your lender or a trusted financial advisor to discuss your options and determine the most suitable course of action.
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