General

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This Blog is written by Sakshi Sahoo from KIIT School of Law, Odisha. Edited by Saradarasagnya Oleti.

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INTRODUCTION

The word moratorium has its origin from the Latin word ‘mora’, which means delay and the word loan has its Germanic origin from the word ‘German Lehn’, which means to lend. Loan moratorium can be phrased as the period of relaxation that is given to the borrower after taking a loan where he does not need to repay the loan. Initially, only the loan moratorium was given to the people opting for an educational loan because there will be a time tag between the borrower and the course he/she must be pursuing, and only after completion of the course the borrower will pay the loan and during that moratorium period the simple interest will be calculated on the loan and then the revised equated monthly installment (EMI) will be released on the basis of which the borrower will pay the loan.

SIGNIFICANCE OF THIS DEVELOPMENT

The significance of the moratorium period is that when the borrower will be capable financially to repay the loan, they will start repaying it.

IMPACT

The moratorium differs accordingly, so let’s know its impact on different types of borrowings:-

1• On Loan: Since the borrower will not be paying the equated monthly installment (EMI) for the moratorium period the equated monthly installment of those months will be added to the outstanding loan and accordingly the borrower will pay according to the higher and revised principal amount. For instance – Yogesh has a term loan of Rs 25 lakh at 9% rate of interest p.a. His EMI is Rs 22,493 for 240 months or 20 years. His Principal outstanding after 12 months as of March 31st, 2020 is Rs 24,53,182. If he avails 2 months moratorium for the months of April 2020 and May 2020, then the principal outstanding from June 2020 would be Rs. 24,89,949.

2• On Credit Cards: Usually borrowers’ do not opt for moratorium period on credit cards since the borrower will have to pay interest on interest which will end up being a huge amount.

PROVISIONS OF LAW

Every law that we follow is adhered to by an Act in India since we have coded and systematic laws. Similarly, for the moratorium, there are laws too and it is coded in the act called The Banking Regulation Act, 1949 [1]. The Banking Regulation Act was enacted to consolidate and provide for a suitable framework for regulating the banking companies. The act deals with regulation, control, suspension, and winding up of the business of the banking companies. The act also provides for penalties in case of violation of the provisions of the act.

The section 45(2) of the act talks about the moratorium period which states- The Central Government, after considering the application made by the Reserve Bank under sub-section (1), may make an order of moratorium staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it thinks fit and proper and may from time to time extend the period so however that the total period of moratorium shall not exceed six months.

Explanation of the section is that the central government has allowed the Reserve Bank to grant moratorium period to borrowers having a time bar not exceeding six months.

CURRENT SCENARIO OF LOAN MORATORIUM

On 22^nd May, the RBI announced its first Bi-Monthly Monetary policy[2] of 2020-2021, where RBI cuts repo rate by 40 bps. When the lockdown started RBI had extended its moratorium policy for three months as there was lockdown nationwide due to coronavirus. Then RBI’s monetary policy was released where it again extended the moratorium period for three months that is till 31^st August 2020, for all the outstanding loans due on 31^st March 2020. The post-September, time can likely shoot up to Rs.10 lakh which is very high.

The Supreme Court has asked recently the Reserve Bank of India to waive interest on the moratorium period due to nationwide lockdown. But The Reserve Bank of India told the Supreme Court that it cannot waive interest on the loans for the moratorium period, as it would though affect the financial stability of the banking sector. In the affidavit filed in the top court estimated the interest payable on these loans to be Rs2.01 lakh crore, or equivalent to 1% of India’s gross domestic product. The central bank files the affidavit in response to a courts notice on a petition seeking interest wavier during the moratorium period. Since customer profiles differ, the manner or recovery of interest has been left to the discretion of the lending institutions, said The Reserve Bank of India. The Reserve Bank of India said that the moratorium would help reduce the immediate burden of the borrower and also take care of the effective income of banks which are commercial entities and need to sustain themselves to remain to be the guardian of depositors.

CASE LAWS

Bari Doab Bank Ltd Vs Union of India[3]

The petitioner in this case files a petition for special leave to appeal against the judgement of the Delhi High Court dated 23-3-1997. The appellants are banking companies governed by the Banking Regulation Act, 1949. The writ petitions filed by the petitioners were dismissed by the single learned judge and letters patent appeals files against the judge were dismissed in the impugned order. The learned judges held on the purpose of the moratorium period that the petitioners cannot claim a right to be heard at a stage prior to the passing order but the petitioners can have post decisional opportunity. The special leave petitions were dismissed.

Chandeshwar Prasad Singh V The State of India &Ors[4]

The State Bank of India charged compound interest for the moratorium period to the appellant. Since the appellant was unable to pay he was again charged extra Rs.4000 in his revised equated monthly installment. The court held that in absence of any specific covenant enabling the Bank to charge compound interest during the period of moratorium, the Bank is not justified in charging compound interest for the moratorium period. In the specific case, the appellant did not raise a specific plea that the bank has calculated compound interest during the moratorium period and this statement is not denied by the Bank nor did the Bank make it specific assertion that what the Bank charged during the moratorium period was a simple interest at the agreed rate. In absence of such denial or the assertion, the court had to held that Bank was charging compound interest on loan moratorium period acted high-handedly. Such an action of the Bank is neither supported by the scheme framed by the Reserve Bank of India nor by the terms and agreement of the loan agreement.

ANALYSIS

Every topic has its pros and cons similarly opting for loan moratorium will only exempt you from paying your loan from a certain period of time and will put you on an EMI holiday. But the interest will be calculated still on the outstanding payment to be done. According to me it is wise not to opt for loan moratorium unless you are having cash flow issues because if you opt for it will be a bigger liability on you when it will be the time to repay.

For instance: – let us assume Sita has an outstanding payment of Rs.1, 00,000 having an interest rate 8%. The simple interest for 1 year will be Rs.8000 and similarly simple interest for three months will be Rs. 2000. So, when Sita will pay her loan after the moratorium period she will pay her regular EMI and the simple interest that we calculated.

For the people who have taken loans initially then they should not opt for a moratorium and it will be wise of them to continue repaying their loans because if they do so the outstanding amount at the end will be huge and the same goes for the credit card holding people.

CONCLUSION

Every individual has its own opinion, which varies from one individual to another. Similarly, everything has its both sides and its own advantages and disadvantages. The situation of the borrowers varies due to the circumstances and many other factors so one should opt the correct option accordingly because of interest that an individual will pay works night and day even in fair weather and in foul.

Accepting the offered loan moratorium facility without thinking through could lead to bigger financial complications in the future. More importantly, this moratorium by no means is a loan waiver. Repaying your loans is a legal and moral obligation in which you are bounded, and this moratorium period does not change that a bit. So, if your cash flow has not changed much then one should try to clear their dues rather than delaying and taking moratorium on that loan. especially when it comes to high-interest charging debts. And in case one does not have any option then ensure that you should have a plan to repay all your outstanding dues, including additional interest charges, soon after the moratorium ends.

REFERENCES

[1] The Banking Regulation Act, 1949

[2] Bi-Monthly Monetary Policy by RBI

[3] Bari Doab Bank Ltd Vs Union Of India and Ors 2001 103 Comp Cas 235 P H, (1998) 118 PLR 135

[4] Chandeshwar Prasad Singh Vs The State Of Jharkhand W.P. (s) No. 4737 of 2011