Explained: Loan moratorium

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As mentioned in the oxford dictionary, the word Moratorium refers to a legal authorization to debtors to postpone payment. Similarly, the Cambridge dictionary defines moratorium as the period for stopping of an activity for an agreed amount of time and it helps its corporate debtors from any downfall and provides temporary relief. Therefore, a moratorium period is a time period during which the borrower is not required to make repayment of loan in the form of EMI.

Recently, the Governor of the Reserve Bank of India announced the Extension of Loan Moratorium by 3 Months from June 1 till August 31, 2020 in a press conference on 22 May, 2020. Before this the Loan Moratorium period was extended for 3 months which was ending on 31st May, 2020. With this extension it is a total of six months moratorium period extension. Hence, a valuable step by the government to provide some relief to the people in this pandemic of COVID-19 which has taken up to 3,42,029 people lives. The objective of this initiative is to provide relief to many individuals, particularly who are self-employed because in this situation where everything is locked down, they might suffer financial crisis and they might not be able to pay their car loans, home loans or  EMIs.

According to the Statement on developmental and Regulatory policy the Central bank permitted Commercial banks, Co-operative banks, small finance banks, local areas banks, All-India financial banks even including housing finance companies and micro-finance institutions to allow Moratorium period of three months.

Impact of extension

  • Impact in case of Home loans- Loan of 30 lacs with remaining period of maturity of 15 years, the additional interest payable would be Rs. 2.34 lacs. approx. equal to additional 8 EMIs.
  • Impact in case of Auto loans- Loan of 6 lacs with remaining period of maturity of 54 months, the additional interest payable would be Rs. 19,000 approx. equal to additional 1.5 EMIs.

Background of this development

 The Loan Moratorium period is often called “EMI Holiday”. Moratorium is only reprieve and not waiver. It will increase your bill in future. Insolvency and Bankruptcy code, 2016 introduced the concept of moratorium. The COVID-19 pandemic has hit the economic hard, many cases of bankruptcy will come up in future. The main objective of the Insolvency and Bankruptcy code, 2016 is to reorganise and insolvency resolution of corporate persons, partnership firms and individuals.

Many committees were formed like Tiwari committee, Narshimhaa committee, L.N. Mittal committee, Raghuram Rajan committee but finally in 2016 joint parliament committee brought its Insolvency and Bankruptcy code, 2016. With the moratorium clause in section 14 to provide a moratorium period as a period in which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets or termination of essential contracts can be instituted against the corporate debtor. This was a major relief to debtors in case of crisis as one ongoing pandemic of COVID-19 which has brought great economic loss to all the countries around the world.

Salient features

Interest will not be waived off on the payment. In this scenario you have to pay additional interest which clearly means an additional EMI with extra interest. However, there are certain merits to opt for loan moratorium period:

  1. This will not spoil your credit score.
  2. Credit cards will not be blocked if you don’t pay during these 6 months.
  3. No late payment fees during this 6 month of loan moratorium period.
  4. Pranjal Kamra, CEO, Finology recommended that individuals should not apply for loan moratorium period as this will increase their burden in future. So, opt for a loan moratorium if you are totally financially crushed.
  5. Temporary relief but prolonged EMI burden.

Relevant legal provisions

The Supreme Court directed RBI to offer loan moratorium to give some relief to individuals from this pandemic COVID-19 economic crisis. Section 14 of the Insolvency and Bankruptcy code, 2016 defines a moratorium period as a period in which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets or termination of essential contracts can be instituted against the corporate debtor. Under Section 13(1)(a) of the Insolvency and Bankruptcy Code, 2016,the authority can impose moratorium for any matter referred to in Section 14 of this code.

Power grid Corporation of India Ltd. v. Jyoti structure Ltd., the High Court held that the term “against the corporate debtor” means “by or against the corporate debtor”.

In Alchemist Asset Reconstruction company Ltd. v. M/s Hotel Gaudavan Pvt. Ltd, the Supreme Court held that Section 14 of the Insolvency and Bankruptcy code, 2016 came into effect for moratorium then no arbitration proceedings can start or continue against corporate debtors.

Moratorium will not affect any suit or case pending before the Hon’ble Supreme Court under Article 32 held in Canara bank v. Deccan Chronicle Holdings Ltd.

  • Section 14(4) of the Insolvency and Bankruptcy code, 2016 deals with the commencement and effective period of the moratorium.
  • Section 60(6) of the Insolvency and Bankruptcy code, 2016 provides remedy after completion of moratorium period, where Claim of creditor can be raised at court competent with jurisdiction.

A corporate debtor if he violates the provision of moratorium period then he or she can be imprisoned for a minimum of three years which may extend to five years and fine up to 300000.

Section 14 the Insolvency and Bankruptcy code, 2016 read with section 238 of the Insolvency and Bankruptcy code, 2016 acts as shield to bankrupt entities to conclude its insolvency proceeding without any judicial stress.

Critical analysis

This loan moratorium period is just to provide relief to the person, it will not impact the terms and condition of any loan. Under normal circumstances, if loan repayment is not done on time then it will impact the credit history and risk classification of loan can be adversely impacted. The only rescheduling of payment will not put borrowers in default list for the purpose of supervisory reporting and reporting to credit information companies. Therefore, it will not in any way impact the credit history of the borrower.

Conclusion

The ‘loan moratorium’ is granted to mitigate the financial burden of those who are not in the position of paying their EMIs, and are severely hit by the nationwide lockdown. Not being mandatory, the decision of whether to opt for the loan moratorium has been left on the borrowers. Nevertheless, the ones who choose to repay their loan due during the moratorium will still have to pay the accrued interest as the interest on the outstanding amount will continue to accrue throughout the moratorium period. Thus, although, the extension of loan moratorium although seems to be a big relief for the borrowers for now but the coming future will tell whether it is a relief or burden for needy. 

While all these issues are raised by companies and government, in this ongoing battle of words between trade union and government, millions of workers are facing many hardships. The common man is slipping down in poverty and is engulfed in hunger. Looking at the government for some relief these poor people stand. Government has found a way to provide relief by granting a total of 6 month of relief from their car loan, home loan or EMIs. This RBI notification has been a major relief to many. However, as analysed above this will cause increase in the upcoming EMIs amount and can become a real burden on them in future.

Author: Kanishka Vaish from Law College, Dehradun, Uttaranchal University.

Editor: Priyanshu Grover from Symbiosis Law School, NOIDA, Uttar Pradesh.

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