Rate capped at 7% on deferred instalments of loans qualify for moratorium

• Payable only after end of extended tenor

The Central Bank has capped the interest rate chargeable from those who become eligible for the moratorium at 7 percent on deferred instalments, as the banks raised concerns about the interest cost that they are compelled to make in respect of the deposits and other borrowings during the corresponding moratorium period, despite them having to forgo on the income during the same period. 

The issue arises when the bank loses income from loans, which become eligible for the moratorium but they continue to have to pay interest on customer deposits and other borrowing liabilities they take receipt to fund new loans, making a mismatch in the income statement. 

“Up to 7 percent interest per annum as additional interest on the differed instalments in relation to equated monthly instalment (EMI) loans granted in rupee,” the Central Bank said.

While there were some back and forth arguments on whether the borrower should be charged with interest for the period of the moratorium, the current provision is by and large is considered as fair by both parties, as the borrower will be making the interest on the deferred instalments at a far lower rate than what he had been paying before the moratorium.

Therefore, the banks are now allowed to charge interest up to 7 percent on such deferred instalments but chargeable only at the end of the extended remaining tenor of the loan and not at the end of the moratorium period.

The banks will also not have to forgo the interest income on the loans that are on moratorium, 

as they will receive the interest income at the end of the tenor of the loan, which becomes extended due to the moratorium period. 

While the cap is applicable on term loans, for other types of facilities granted in rupee or foreign currency, the Central Bank has allowed flexibility for the bank and borrower to agree on a concessionary rate for the deferred instalments, which the borrower forgoes during the moratorium period he becomes entitled to.

In late March, the Monetary Board listed a range of parties economically affected by the lockdowns, who can apply for the moratorium up to six months. 

During the period of the moratorium, the eligible borrowers are not required to service the loans, which consist of both the interest and capital. Once the moratorium period ends, the customers will have to resume the payment of instalments as agreed before the concessions were offered.