What Is A Moratorium? Will It Help Help During The Pandemic?

What is Moratorium

What is Moratorium

The corona virus pandemic, which began in late 2019 in the Chinese city of Wuhan and spread around the world, continues even today. It gave a massive blow to the global economy. As per experts, COVID-19 is not likely to go away anytime soon. Downgrading of economic forecasts, reduced production activity, service sector decline, chaos in the stock markets, lower bond yields, reduction of world tourism are the main problems caused by the corona virus epidemic. Against the background of this problem, the world economy has entered a state of recession. People are losing their jobs, and entire industries are suffering.

In India, the corona virus pandemic hit the life of a large number of Indians. Many people lost their jobs and are still struggling to find suitable employment. The payment of loan EMIs is a significant concern for such individuals and organizations. That is why the Reserve Bank of India has introduced a loan moratorium to give them the much-needed relief. But, does it help the affected people and companies? Let’s discuss it now.

What Is A Moratorium? A Brief Overview

The word “moratorium” hails from the Latin Language, which means “postponement.” In simple terms,  a moratorium is a postponement of the fulfillment of an obligation. Under its provision, the bank or financial organization defers a loan agreement or other debt obligation. It is granted to people or organizations judicially or administratively. Such an agreement between the debtor and the creditor on stopping payments on debt obligations and providing an additional period for their repayment is beneficial for both parties. It helps avoid bankruptcy and ruin for the former and increases the probability of complete fulfillment of debt obligations for the latter.

Types of The Moratorium

Currently, there are two types of moratorium- (1) General & (2) special. A general moratorium is imposed throughout the country and suspends existing legislative obligations, allowing all citizens to postpone implementation. In addition, the authority will provide you with a general moratorium due to existing force majeure circumstances (natural disasters, epidemics, military conflicts, crises, an epidemic, economic crisis, and other emergencies). A particular moratorium covers a narrow group of people singled out for any specific reason. Finally, a separate suspension has a more unreasonable targeted application and is a clear legal relationship.

Also Read : Long Term Personal Loans vs Short Term Personal Loans

Moratorium Effect On Creditors: Things To Keep In Mind 

First, we need to pay attention to how people file bankruptcy applications during the moratorium period. Let’s assume that the debtor’s bankruptcy application was filed before the moratorium imposed and accepted by the court for consideration. If the Arbitration Court issued a decision on receiving the application, then such a bankruptcy application will be considered according to the general rules. It will have nothing to do with the moratorium. If he submits the application and the court doesn’t accept it for consideration before the date of introduction of the moratorium, it is returned. There are situations when the lender applies already during the moratorium period. Such applications are also subject to refund. It would have been accepted for consideration if the debtor had used it during the moratorium period.

What Are The Specifics of Applying For Debtors’ and Creditors’ Applications?

debtors and creditors

There is often a struggle for one thing- who will be the first to make the corresponding demand. It is due to the provisions of the Bankruptcy Law. The applicant creditor has the right to determine the candidacy of an arbitration manager who will accompany the bankruptcy procedure. If the debtor independently submits its application, it does not have the right to appoint a candidate for an arbitration manager. But the arbitration court does it for it by random sampling.

A creditor has the opportunity to file an application for bankruptcy of its debtor with an arbitration court only after it has made a publication about its intention to file for bankruptcy. Then, after 15 days, he has the right to apply with the court. Here, the moratorium has also introduced its adjustments, which are essential to consider.

If you made a notification before the moratorium was imposed, and the 16th day begins after it starts, then such notice will no longer be valid. If you try to notify the institution of applying during the moratorium period, the publication site won’t accept it. At the same time, the debtor himself has the right to make his publication. RBI resolution framework for loan restructuring allows all eligible candidates to postpone the loan EMIs and get some relaxation in troubled financial life. Each bank has its eligibility criteria for a loan moratorium. So, contact the bank and see possibilities for it.

Can I Get Money From ATM Cards During Loan Moratorium?

loan moratorium

With credit cards, you will not be able to withdraw money during a loan moratorium period. The RBI allows you to take a moratorium on credit card dues apart from other loans. To use regular ATM cards, you’ll have to wait until the moratorium ends.

An Important Thing To Know: What Happens To The Accounts of Legal Entities During The Moratorium?

Legal entities will have a more challenging time. Their accounts are fully frozen as of the morning of the moratorium. You can neither withdraw nor transfer money anywhere. It remains only to wait for the decision of the Reserve Bank of India on the fate of the bank. It can be decided within three months.

At the same time, introducing a moratorium does not save a legal entity from having to pay wages, taxes, pay suppliers, etc. It is considered that the risk of losing access to accounts is a problem of the enterprise. It should be able to find a way out of this situation. However, suppose the Central Bank decides not to revoke the bank’s license but to carry out specific procedures for restoring its activities after some time. In that case, access to the accounts of legal entities will return. A separate issue is the funds of companies that “hung up” in an incomprehensible status — when the bank accepted the transfer order but did not fulfill it. Here, you need to deal with the temporary administration for each specific case — “look for money.”

What Will Happen To Incoming Payments During The Moratorium?

In contrast to the situation with license revocation, all money transferred to the accounts of individuals and legal entities during the moratorium is available for transactions. You can transfer them to your account at another bank, pay someone, or withdraw them in cash (according to the usual rules). The only thing to remember is that the Central Bank can decide to revoke the bank’s license at any time during the moratorium. So, you need to dispose of incoming money very quickly. It would help if you did not leave it on the account even “until tomorrow.” When RBI revokes a bank’s license, you will lose access to the money and only include this amount in your lender’s claims.

Do I Need To Continue Paying Off My Loans After Moratorium Period?

Necessarily. The announcement of the moratorium applies only to the bank’s obligations to you (and other customers) but not to your obligations to the bank. Therefore, you must continue to make contributions the same way as before. If the bank’s license is revoked, the details for paying for loans will change after some time. The same thing will happen if the bank’s loans are transferred to another bank. Therefore, follow the news on the bank’s website and act as required.

Who Can Get Money From The Bank, Despite The Moratorium Period?

Four “privileged” groups can still receive money from the “moratorium” bank-

  • Citizens to whom the bank is responsible for causing harm to life and health,
  • Employees of the bank in terms of severance payments and salaries, as well as those who have an employment contract with the bank to pay remuneration for the results of intellectual activity,
  • Owners of enforcement documents issued before the date of the moratorium introduction based on decisions on collecting the bank’s debt under bank deposit agreements and bank account agreements concluded with individuals.

Receiving Interest On Deposits: What You Need To Know?

Interest is charged on deposits when the moratorium is in effect, not at the interest rate specified in the agreement but at the refinancing rate. It is a moratorium interest rate. If the central bank decides to liquidate a financial institution, the deposit income will be paid only after fulfilling its obligations to creditors. If the bank is at zero after that, then the interest will not be reimbursed. When the company is rehabilitated, depositors are guaranteed to receive a moratorium interest rate.

Also Read : A Detailed Guide on Pre-Approved Personal Loans

Applying For Insurance

Adopting a moratorium on a bank loan gives depositors the right to apply to an insurance company to receive a refund. The amount includes the central part of the deposit and its income. If an enormous amount is invested, the remaining money is lost. If large amounts of money are stored in the accounts, and the banking organization is quite large, it makes sense to wait for the decision of the Central Bank. In such circumstances, the organization is unlikely to be liquidated. The Reserve Bank of India will decide on rehabilitation. Then account holders will receive the entire amount together with interest, only from a deposit in another financial institution.

Pros And Cons of A Moratorium For Debtors

Creditors with a moratorium on bankruptcy have no advantages, but debtors have a whole list of them.

  • The creditor cannot apply for declaring the debtor bankrupt.
  • The creditor may not foreclose on the debtor’s pledged property for the period of the moratorium.

Enforcement proceedings on property penalties for claims that arose before the introduction of the moratorium are suspended. Some companies that have withdrawn from the moratorium have resorted to the following scheme:

  • The first massively suspended all enforcement proceedings against themselves and only then applied for a waiver of the moratorium.
  • Penalties and other penalties for non-performance of monetary obligations are no longer charged. Exception: debts incurred during the period of the moratorium. In other words, moratoria debtors have the right to violate their commitments en masse, and no sanctions under the contract apply to them. Moreover, it also does not apply to debtors.
  • Persons controlling the debtor are not brought to subsidiary liability in connection with the failure to apply for declaring the debtor bankrupt. In the event of an objective bankruptcy of the debtor that occurred during the bankruptcy period.
  • The debtor’s head is not brought to administrative responsibility in the event of an objective bankruptcy of the debtor that occurred during the bankruptcy period.

Cons:

  • Inability to meet the founders’ requirements when they try to withdraw from its shareholders or participants and take their share in cash.
  • Inability to terminate the debtor’s monetary obligations by offsetting a counterclaim of the same kind in violation of the priority.
  • Impossibility of withdrawal by the owner of the debtor’s property — a unitary enterprise-of the property belonging to the debtor and
  • Inability to pay dividends or share income.

What Should I Do During The Moratorium Period?

It is essential for claimants not to forget about actions after lifting the moratorium. Experts advise analyzing the debtor’s activities for transactions made to challenge them or bring the persons controlling the debtor to subsidiary liability.

Conclusion

A moratorium is an effective tool for overcoming crisis phenomena in any country. It is a temporary arrangement that facilitates the postponement of loan EMIs for three months. Both individuals and financial organizations can take advantage of this facility. Banks allow you to take a moratorium once you meet specific terms and conditions. For example, during the Covid pandemic, the RBI loan moratorium helps people manage their finances well and make alternative arrangements for loan repayment later. Talk to your banker regarding this and see if you can get a loan moratorium. Never take unfair advantage of a moratorium & fulfill the loan commitment without fail.