Understanding Loan Moratorium and Restructuring
The moratorium, a facility offered to borrowers facing unforeseen circumstances, allows temporary relief in repaying EMIs. However, it comes with inherent costs, such as accrued interest without immediate repayment. The decision to extend the moratorium or not is crucial for both banks and depositors.
What is Moratorium?
Moratorium is a financial boon for borrowers who weren't prepared for such eventualities. It exempts them from EMIs for a stipulated period, without downgrading their credit status. However, this period is limited, as excessive deferment impacts the liquidity of banks and their ability to meet depositors' interests.
Role of Banks in Loan Recasting
Banks channel deposit savings into loans, offering interest rates marginally higher than those on deposits to cover administrative and profit margins. The deferral of EMIs due to moratorium means banks lose the accrued interest from loan repayments, requiring them to manage their commitments through capital reserves.
Impact on Depositors and Borrowers
Depositors, particularly senior citizens, heavily rely on the interest earned from their deposits for their livelihoods. Therefore, if borrowers fail to repay, the impact on depositors is significant. Banks, acting as intermediaries, must either reduce repayments or find alternative methods, such as loan restructuring, to alleviate the situation.
Loan Restructuring: A Solution to Financial Stress
To address the needs of both borrowers and banks, restructuring was introduced. This process reimplements loan terms based on a comprehensive reassessment of the borrower's financial status, focusing on the current cash generation. Restructuring allows for rescheduling of payments and converting interest into another credit facility, with an option for moratorium up to two years.
RBI’s Reserve Bank of India Guidelines on Restructuring
The RBI has set stringent guidelines for restructuring, ensuring that only prompt borrowers, as on March 1, 2020, can benefit. Overdue accounts before February 2020 are not eligible. Additionally, the restructuring process must be completed by December 31, and implementation within 90 days to avoid delays.
RBI's policies also allow for extended EMIs and extended loan tenures based on the borrower’s current financial situation. This ensures that stressed borrowers can effectively plan and improve their repayment capacity.
Conclusion
Loan moratoriums and restructuring provide temporary relief to borrowers, but they significantly impact the financial health of banks and depositors. By understanding the intricacies of these financial tools, both banks and depositors can navigate these challenging times more effectively, ensuring long-term stability and financial security.