The apex bank of India, the Reserve Bank of India, is the chief regulator of all banking and financial policies relating to individuals, and corporate and non-corporate businesses. Small and Medium Enterprises (SMEs) running small-scale businesses, such as travel, retail, and restaurant, rely on the moratorium policies of the government to get temporary relief from the financial pressures of repayment of their term loans in the form of EMIs. This article aims to provide a detailed insight into the moratorium policies of the government for loan borrowers and the impact of these policies on EMI repayment for loans taken by SMEs.
Before proceeding further, let us first understand the meaning of specific terms related to the moratorium.
Moratorium Meaning and Concept
In a general sense, the term ‘moratorium’ means to stop or postpone an activity for a specific period. In financial terms, it is defined as a legal authorization given to debtors to defer or delay the payment of their debt for an agreed duration.
Loan moratorium refers to the deferment of loan repayment liability for the borrowers. The Loan moratorium period is a period during which the borrowers are not legally obligated to make repayment of their term loans.
On similar lines, EMI Moratorium (also referred to as EMI holiday) is the temporary suspension of the Equated Monthly Installment (EMI) payment liability of the borrowers. Hence, the borrowers do not have to pay EMIs on loan taken for a stipulated time (EMI moratorium period). Lenders do not levy late payment fees/charges or penal interest for non-payment of EMIs during this period. Yet, the borrowers must pay the interest that accrues towards the loan during the moratorium period.
The government and other financial regulators announce loan or EMI moratorium policies to resolve the temporary financial hardships in an economy caused due to various factors such as natural calamities, pandemic, the bankruptcy of a company or a business, and so on. The individuals or business/corporate borrowers use the temporarily suspended period to plan their finances and find tangible solutions to alleviate their financial issues.
Moratorium calculators are specialized online financial tools used to calculate the impact of the moratorium on the tenure of the loan, EMIs payable, and the accrued moratorium interest to be paid by the borrowers after the cessation of the moratorium period. As per the directives of the RBI, these calculators are used by the financial regulators and agencies of the government (banks and non-banking financial companies) to help term loan borrowers determine the revised EMIs and additional interest accrual on their outstanding loan liability.
The formula used by the loan moratorium calculator is as follows:
MIR for loan = AIR/12
(where MIR is the Monthly Interest Rate and AIR is the Annual Interest Rate)
The tenure of the loan gets extended due to the deferment of EMIs during the moratorium period, and hence, EMIs payable after the moratorium period are recalculated using the online EMI moratorium calculator. The information required is the loan amount, rate of interest, remaining loan tenure, number of EMIs already paid, and the number of months of availing the moratorium facility. The objective is to ascertain the impact of availing the moratorium facility on the EMI repayment.
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Moratorium Interest Calculation
Accrued interest is calculated by charging simple interest on the loan principal outstanding amount for the number of months of the moratorium period. The formula for moratorium interest calculation is as follows:
Accrued Interest for the first month (A) = Loan Principal Outstanding x MIR/100
Accrued Interest for the second month (B) = (Loan Principal Outstanding + A) x MIR/100
Accrued Interest for third month (C) = (Loan Principal Outstanding + A + B) x MIR/100
Likewise, accrued interest for all the months of the moratorium period can be calculated by adding the interest of prior months to the loan principal outstanding amounts of the current month and multiplying with the simple monthly interest rates. Total moratorium interest is the sum of accrued interest of all the months of the moratorium period.
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Recent Loan Moratorium Policies by RBI
In March 2020, the Reserve Bank of India (RBI) announced a three-month loan moratorium to the borrowers for repaying the installments of their term loans and suspension of interest on the working capital. It entailed the extension of the loan tenor or repayment of term loan installments by 90 days.
The policy provided a moratorium of all the EMI payments due from March 1, 2020, till May 31 2020, including the principal and interest amount of the outstanding loan balances. To provide further relief to the SMEs, the RBI extended the loan moratorium by another three months (from June 1 till August 31) in May. All the borrowers, having outstanding loans and EMIs as of March 1, 2020, were eligible for this moratorium. The purpose of introducing this moratorium policy was to boost the economy by easing or mitigating the crunching cash-flows and other financial burdens of the small businesses caused due to the Covid-19 pandemic.
The moratorium was also applicable to the credit card loans of the SME borrowers. The RBI directed the banks and credit card issuing companies to grant moratorium for payment of credit card dues from March till August, thus, providing them with temporary relief of six months to pay their credit card bills. Just as for term loans, interest accrued on the unpaid credit card dues during the moratorium period.
Due to the non-availability of sufficient funds to meet their working capital requirements, SMEs procure short-term unsecured loans from banks and other financial institutions. These loans are provided at competitive interest rates to help SMEs expand their business operations. The small-scale business owners use the loan amount to incur capital expenditures (for purchasing fixed assets like machinery and equipment), revenue expenditures (for purchasing raw materials, paying salaries, etc.), or to finance the working capital requirements.
The ongoing coronavirus pandemic has adversely affected the financially-fragile small businesses or SMEs due to a sharp decline in demand and sales of their products and services during the lockdown period, thus impacting their revenues and loan repaying capabilities. The scarcity and insufficiency of cash inflows were causing massive disruptions in the liquidity position that was further leading to non-payment to suppliers and employees, job-cuts, and even bankruptcy of a few of the SMEs!
Impact of Moratorium Policies on SMEs
Moratorium policies by the RBI, as announced during the Covid-19 period, considerably helped in managing the cash flow or liquidity position and working capital requirements of the borrowers, specifically the owners of small businesses such as travel, retail, restaurants, etc. These policies have ensured the continuity of these businesses by taking into consideration the high volume of daily cash-based transactions. The moratorium facility was offered to SMEs on an opt-in basis, meaning that only those small-scale businesses that opt for this facility could avail the benefits from it. It proved to be a boon for the SMEs who were not able to pay their EMIs and hence, provided a breathing space to handle their cash-crunch position, that too without even hurting their credit score!
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To safeguard the loan accounts of SMEs, the government declared that the non-payment of EMI instalments and deferment of interest would not consider the loans as Non-Performing Assets (NPA). SMEs could thus gain control over the expenses and divert or re-allocate their funds to other essential projects to increase the operational efficiency of their business. Apart from this, they were eligible for the interest benefit on their term loans in case they decide to pay the EMI instalment during the moratorium period.
The moratorium on the payment of credit card bills was a windfall gain for a large segment of small scale entrepreneurs who were extensively using their credit cards during the lockdown period. The objective of announcing the moratorium was to minimize the adverse macroeconomic impact of the coronavirus outbreak on the SMEs.
The Flip Side of the Moratorium
The small business owners welcomed the loan moratorium policies by the RBI as they are at the highest risk of defaulting repayments of the EMIs during the crisis. However, they must be mindful of the fact that these policies are just a deferral and not a waiver of their loan liabilities for a few months. The lender capitalizes the accrued interest (add up to the principal loan amount) and draws up a revised EMI repayment schedule for the SME borrowers once the moratorium applies to their loans. Therefore, the banks and other lending institutions will charge the outstanding moratorium interest costs on the unpaid amount during the loan moratorium period and the borrowers will have to pay the revised EMI amounts once that period is over.
By deferring the EMI repayment of their loans, the small-scale borrowers will not only bear the higher interest costs (and thus pay higher EMIs and taxes in the future). Still, they will also witness the extended tenure of their loans after the cessation of the original loan tenor. The extension of the tenure depends on the number of months for which the borrower has availed the moratorium. When a small business owner opts for a moratorium, then missing or deferring the EMIs in the initial years (within four to five years) leads to larger compounded additions of the interest costs to the loan, as compared to a borrower who has completed 8-10 years of the loan tenure.
Thus, at the end of the moratorium period, the SME borrowers are left with three options:
- To make a one-time payment of the outstanding interest.
- To add the compounded interest to the outstanding loan amount and hence, increase the EMI instalment payable for the remaining tenure of the loan.
- To keep the monthly EMIs unchanged and increase the tenure of the loan.
By availing moratorium, SMEs face the double-whammy of paying higher interest or increasing the loan tenure. It is always advisable to pay the EMIs regularly to avoid paying large EMIs in the post-moratorium period. SMEs need to be more vigilant while deferring their credit card dues due to the exorbitantly high-interest rate charges attached to them.
The moratorium policies announced by the RBI and government have taken a long-term perspective to ensure that the creditworthiness of the SME borrowers is not impacted, and there is a radical transformation in their financial and cash-flow position.
Revised Loan Moratorium Policy
To provide a big relief to the borrowers, the government recently announced to renounce interest on the accrued interest of the six-month EMI moratorium period, and special concessions for those who paid EMIs during the Covid-19 financial crisis. The central government has filed an affidavit in the Supreme Court for waiving off this interest for the benefit of the loan borrowers. The relaxation will also be available to SMEs who have taken a loan up to Rs. 2 crores and have opted for the moratorium offered by the government.
Moratorium policies announced by the government and the RBI aims to help individuals and businesses manage the cash flows through the deferment of their EMI repayment liability. The efficacy of these policies depends on the economic recovery of the borrowers during the moratorium period. The SMEs stand to gain from the moratorium policies as they get significant relaxation from the pressures of EMI repayment during the moratorium period. They leverage this opportunity by redirecting their cash flows to financially profitable projects that can generate more funds to meet their working capital requirements.
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