What is Moratorium Period-Definition-Meaning-Examples-Wikipedia of Finance

What is Moratorium Period? Definition with Examples

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During a moratorium period, lenders suspend or postpone certain financial obligations, usually loan payments. This allows borrowers to temporarily refrain from making monthly loan payments, granting them a short-term financial respite. Lenders and other financial institutions may impose moratorium periods in reaction to certain circumstances, such as recessions, natural disasters, or other unanticipated events that may make it more difficult for borrowers to fulfill their repayment obligations. Here are the measures undertaken by one of the top private bank to safeguard the balance sheet against the pandemic. It also covers on how he is tackling potential risks and uncertainties

It is important to keep in mind that a moratorium term just delays the payback need for a predetermined amount of time; it does not erase or eliminate the outstanding debt. In order to understand how the moratorium may impact their loan obligations, including potential effects on interest accrual, repayment schedules, and future payments, borrowers should carefully review the terms and conditions of the moratorium with their lenders. The current scenario has tested the resilience of banks while dealing with unprecedented global economic challenges. All the leading banks have followed certain strategies to cushion the impact of the pandemic, including their loan book under the RBI’s moratorium policy.

What is Moratorium Period?

Moratorium period means it delays the EMI (Equated Monthly Instalment) for the given time period. Typically, loan repayment commences immediately after the loan disbursal. Essentially, a moratorium serves as a grace period provided to borrowers following the disbursal of the loan. Nevertheless, borrowers must still pay the accrued interest during this moratorium period. This period is alternatively refer to as an EMI holiday or deferment period.

Lending institutions might alter the length and terms of moratorium periods based on their policies and the external environment. Interest may still accrue on a loan during a moratorium, but debtors are not required to make principal or interest payments. The goal of a moratorium is to offer debtors facing financial challenges a temporary reprieve, allowing them to stabilize their situation without immediately confronting the burden of loan obligations.

Examples of Moratorium Period

Let us take moratorium period example to understand the concept. There are many personal banking services offered by private banks. In-case of home loans, when there is a delay in construction, banker offers EMI holiday to their borrowers.

Here is another example of moratorium period for education loan to understand it better. Typically, students repay educational loans after completing their graduation and securing employment. The period from when the education loan is disbursed to cover college fees until the student graduates and finds a job constitutes a moratorium period. Student need to pay EMI after moratorium period is over.

Moratorium Period under Covid-19

In view of your Covid-19 crisis, we are forced to live and experience a life which was never before. We have to fight this particular crisis and help ourselves and our family to be safe through this short-term situation. At this particular point of time we are following Government of India guidelines for our safety.

Role of banks are important for economy growth and development of the country. The Reserve Bank of India (RBI) have extended a choice to avail six-month moratorium period to each borrowers of NBFCs, Banks and FIs on their debt-servicing obligation, up to 31 August 2020.

In simple words, it means that borrowers will not have an obligation to pay their EMI instalment prescribed by the RBI for the period of 6 months. The whole loan agreement between the borrower and lender remains the same except for the moratorium. We anticipate that the moratorium will ease interim liquidity during the pandemic situation. Additionally, it is expected to provide relief to affected parties.

Conclusion

It’s crucial to remember: a moratorium period doesn’t provide a permanent solution. It doesn’t relieve borrowers from their debt obligations. Borrowers need to assess the impact on their loan obligations, repayment plans, and future finances. Interest might still accumulate during the moratorium.

The current pandemic has been a unique challenge to banks. However, with a consolidated strategy, banks have been able to protect their balance sheet from excessive shocks. Ultimately, cooperation, openness, and clear communication between lenders and borrowers are essential to a moratorium’s efficacy. By collaborating to get through difficult times, both sides can strive for sustainability and financial resilience in the face of hardship.

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