This article is written by Aiswarya R Hormis. 

Abstract

This article will make us understand what moratorium is and it will clearly establish the reason for imposing moratorium during COVID-19 in most of the countries. The history of the moratorium, the way it started is also explained so that the reader would understand the need for imposing a moratorium. Moratorium by banks is not a new concept it has roots in Roman Laws. The World Bank and International Monetary Fund have given a combined notification to give loan holidays for a few countries. Such notifications by Banks and Organisations would be of great help during the time of this great pandemic Corona (COVID-19). Though this moratorium is a good initiative, it obviously comes with drawbacks and even those are dealt with in this paper and few suggestions are also given accordingly.

Introduction

A moratorium is generally known for delay of some activity until further orders. And the word ‘Moratorium’ in Blacks Law Dictionary is defined as “Delay in performing an obligation or taking an action legally authorized or simply agreed to be temporary.” Whereas it is also defined as “Grant of an extended period in which to repay a loan or a period during which the repayment schedule is suspended. Usually, it refers only to the repayment of capital, and interest payments may still be required.” And it is also dealt in Kothari’s Credit Derivatives as follows “Generically means the time period allowed before repayments or payment of interest on a loan begin. In the context of credit derivatives, as a credit event, moratorium means the statutory or other action by a reference entity whereby the reference entity grants to itself a moratorium during which interest and principal payments will stand deferred. Usually, such action is taken by sovereigns during financial difficulties. See also credit event.”

When we look at the origin of the word ‘Moratorium’ it originated in Roman Law and is derived from the word ‘prescript moratoria’, which is meant as a deferment of payment granted by an imperial edict. The word ‘moratorium’ is derived from the Latin verb ‘moror’ meaning ‘to delay’ and the effect of a moratorium being created by an authority is that payment on bills and notes is extended until the expiration of the time named in the statute creating the moratorium.

In Indian law, the word Moratorium is nowhere defined but it is used in the Banking Regulation Act, 1949, regarding Suspension Of Business And Winding Up Of Banking Companies. This is used during the temporary financial crisis in a place so that it would give relief to the citizens of the country. This period of moratorium officially authorizes the debtor to legally postpone payments for a specified time to enable him to adjust to the financial conditions. The debtor is given some relief during this time of moratorium but the creditor is also not at risk because the amount will be repaid by the debtor after the prescribed time. And in this situation, banks don’t have any loss because this repayment of the amount after prescribed time is with additional interest for that moratorium period and thus banks are not at risk.

Moratorium during the time of COVID-19

During the spread of COVID-19, the Reserve Bank of India gave some relief and announced a few measures to be taken by the banks. And these measures were optional for the banks in applying them. And three nationalized banks State Bank of India, Canara Bank and IDBI Bank have come forward and offered a three-month moratorium on term loan instalments to their borrowers. And this period of 3 months would be from March 1st to May 31st 2020. This moratorium includes personal loans and credit card dues also and this moratorium doesn’t affect the Credit Information Bureau (India) Limited (CBIL) score.

All commercial, co-operative banks and all- India Financial Institutions and NBFC are permitted for this moratorium. And this is not the first time for imposition of such moratorium by RBI. Earlier during the time of demonetisation, RBI gave relaxation for 60 days to small borrowers’ accounts for recognition of an asset as sub-standard. And now as RBI also stated that these 3 months starts from March 1st 2020, it is presumed that only outstanding loans by March 1st are considered and new loans after March 1st aren’t considered.

History of a moratorium in international law

The term of moratorium has its origin from Roman Law. The application of moratorium has a long history in the international sphere. The French government passed moratory laws during the Franco-Prussian in the nineteenth century. During the First World War, the British Crown adopted moratoria on commercial transactions. Post-World War I and during the world depression of the 1920s and 1930s, moratorium proved to be a useful tool for solving the defaulting issue of external indebtedness. A Conference of the Principal Allied Powers was held in Paris in 1923 to discuss the issue of settlement of international debt along with whether the moratorium should be granted to Germany. In 1931 during the Recession period, President Herbert Hoover of the United States announced a one-year moratorium for repayment of war debts and reparations among all principal nations which was approved by the U. S as an Act. In the wake of the 2004 tsunami which hit Sri Lanka, Indonesia and Seychelles, the Paris Club of creditor nations announced an “immediate and unconditional” debt moratorium for these countries.

Impact of COVID-19 on the world economy

Effect on the banking sector

The Coronavirus pandemic has resulted in a dip in world economic progress. the International Monetary Fund has conducted a survey and reported that the virus will result in slow global growth which will result in more burden on the corporate balance sheet. It will negatively affect the health of the banking industry. Mr Shaktikanta Das, Governor of Reserve Bank of India, has warned the Indian banking sector that they must be prepared to face the above-mentioned challenge. Added to this is the problem of slow domestic credit. For this reason, banks should focus on credit offtake which has seen a decline to 7% in recent months, there should be an increase in the operational efficiency of banks. Good governance and an internal control system are key tools to help tackle this emerging problem. 

The World Bank Group in unity with International Finance Corporation (IFC) has decided to provide a fast-track facility (FTF) to help the countries who are affected by the Coronavirus to immediate health consequences that have arisen. On April 2nd, 2020, the first group of projects under the FTF which amounted to the U.S. $ 1.9 billion was rolled out. This assisted 25 countries total. The total package is $12 billion. This helps the countries to prevent, detect, and respond to the rapid spread of the coronavirus.

IFC has increased its share from $6 billion to $8 billion of the total package and this is mainly to support private companies and their employees who are negatively affected by the economic dip. The pandemic has resulted in a fall in the demand and supply chain. For this reason, the bulk of the finance from FTF is directed towards financial institutions to allow them to continue to provide trade financing, working capital support and medium-term financing to private companies who are suffering because of the fall in the supply chain. In addition to monetary help, the World Bank Group has decided to provide technical assistance and also goods and services facilities to prevent regional community spread of the pathogen including laboratory equipment and systems to ensure proper identification of positive cases of the virus. Goods such as gloves, masks, portable ventilators and support infrastructural needs such as stocking of emergency rooms, clinical care, quarantine facilities and so on are provided by the World Bank Group. 

It is also pertinent to note that there is a need to support small business which is done through a short term floating rate capital finance system provided by the World Bank. It has the aim to supplement the availability of working capital

International monetary fund

The Corona Virus has spread rapidly to almost 1/3rd of the total number of member states of the IMF. This means that COVID-19 is no longer a regional issue, rather it is a global issue which requires global solutions. It is a known fact the outbreak will eventually retreat, but when and how long it will take to do so is still in ambiguity. The supply chain in the economy is disrupted due to difficulties in mobility and rise in mortality. Mobility is affected because countries are frantically trying to contain the spread of this contagious virus. Added to these effects is the tightening of credit which negatively affected the banking sector and ultimately the general public. 

Out of the total impact of situations like the present, one-third of the loss will be due to loss of lives, employment and workplace losses and quarantine. The remaining two-third represent the indirect effect, which is a retrenchment in consumer and business behaviour and tightening of the financial system. The main problem is that of uncertainty. Global growth in 2020 will be lower than in the previous years’ level. One of the primary responses undertaken by the IMF is ensuring front-line spending to protect the well-being of the people, the health of the public and to ultimately arrest the spreading of the contagious virus. Appropriate authorities have to help in funding outbreak-related health spending. There is an urgent need to match the demand and supply of health treatments, medicines and other medical products. Micro-financial policies are undertaken to tackle the demand and supply issue. 

The IMFC has adopted the following measures to economically help countries that are affected by the Coronavirus:

• Enhance access to emergency facilities.
• Build up their capacity to cater the poorest member states.
• Help countries who are facing foreign exchange shortages and difficulties, including short-term liquidity lines.

The U.S States Congress has approved to strengthen the IMF’S resources. This is a good international indication and gives strength to IMF’s US$ 1 trillion lending capacity. This is extremely beneficial at this point of time when countries are crying before the IMF to financially support them in their fight against the Corona pandemic. As part of improving the financial resource and governance of IMF, the IMF Executive Board gave its approval on 16th January 2020 to a doubling of the IMF’s New Arrangements to Borrow (NAB) credit lines. Now what is required is legislative approvals in some participating countries. The main source of financing for the IMF is quotas. This is their first line of defence to provide financial support to the world economy. Each member state is allotted a quota which is dependent on their position in the world economy.

Through the New, Arrangements to Borrow a number of countries are ready to lend additional resources to the IMF. This constitutes the second line of defence to supplement IMF to finance countries in case an international monetary crisis occurs. The third line of defence to back the IMF is Bilateral Borrowing Agreements. At a time when the entire economy is declining the IMF urges the Bilateral creditors to make a major contribution by offering a debt standstill to IDA- eligible countries. On January 16th, 2020 a modification was brought about in the NAB. It doubled the NAB from the current SDR 182.4 billion (about US $ 252 billion) to SDR 364.7 billion ( about US $ 504 billion), for a new NAB period from 2021 to 2025 along with few other amendments. 

Another issue that has to be taken into consideration in the prevailing economic circumstances is that of the debt of poor countries. The Executive Board of IMF approved a reform of the Catastrophe Containment and Relief Trust (CCRT). This allows the poorest of the country members to invest as part of crisis response rather than repay the debt or fund. By virtue of the CCRT, the IMF is able to deliver grants for debt relief which will benefit the poorest of its members during catastrophic natural disasters and major, fast-spreading public health emergencies. The COVID-19 outbreak is a perfect situation for the IMF to immediately support funds to its member states, especially the low-income members who are affected by the pandemic. This will help the countries to provide for medical health facilities and other immediate needs in this challenging economic scenario which has resulted in a loss in revenue, higher expenses and a sharp decline in national income. The changes brought about by the Executive Board includes expansion in the qualification criteria for the CCRT. It now allows all member countries having per capita income which is lower than World Bank’s operational threshold for concessional support as part of debt service relief for a period up to two years. In the present, the IMF has the U.S. $200 million as part of CCRT and they desire to increase this capacity to better respond to the most vulnerable members of the IMF. 

Moratorium by banks in other countries

Before discussing banks in other countries, let us start with the World Bank along with the International Monetary Fund. World Bank and International Monetary Fund released a joint statement on March 25th, 2020 in accordance with pandemic COVID-19 that there will be debt relief to International Development Countries (IDA), there are almost 76 countries which get this relief to protect them from the economic fallout. Even if not the World Bank or IMF, the sovereign countries can call for itself a unilateral debt moratorium, because it is a humanitarian emergency. And these IDA countries cover almost two-thirds of people living in poverty. And the IMF and World Bank called on the Group of 20 nations to support the initiative for “all official bilateral creditors to suspend debt payments from IDA countries that request forbearance.”

Calculations from non-profit network Eurodad show that 69 of the world’s poorest countries are due to pay $19.5bn to other governments and multilateral institutions, and $6bn to external private lenders this year.

The International Monetary Fund immediately made 50 billion dollars available in emergency financing whereas the World Bank approved 14 billion dollars and the IMF is planning to put this money over countries with weak health facilities whereas the World Bank is planning to support both in health facilities and also in financials. And now if we go to the list of banks in various countries which applied moratoriums are numerous as of date. Almost every country had announced to give moratorium to all the citizens who are interested and who had a loan in banks and this loan varies according to country and their moratorium rules. Homeowners with hefty mortgage repayments and borrowers who have taken large sums of bank loans to sustain their businesses risk falling into default as world economies take a sharp dive amid nation-wide lockdowns and a halt in most international travel.

Many developed and developing countries offered moratoriums to the debtors because this moratorium gives relief to citizens and this is in the form of giving relief to people when the whole nation is in need. And some important countries like Malaysia, Singapore, Thailand, Britain, Italy, the United States, Canada are a few major countries working on a moratorium.

Canada

Even in Canada, the banks gave a period of 6 months to repay the loan amount and for this six banks came forward to give the relief. And this moratorium was not only restricted to loans but it is also extended to credit card repayments and to extensions on mortgages’ amortization periods. So, this relief is given to a vast number of people and it would help many of them.

Malaysia

Malaysia gave a long-term moratorium of six months from April 1, 2020. The National Bank of Negara in Malaysia announced moratorium on all the loans and financing which are not in arrears of more than 90 days but this doesn’t apply to credit card balances. The National Bank of Negara also said that it will allow its customers to change the outstanding credit card balance to term loan for not more than 3 years. And after this statement, many other banks in Malaysia said that they wouldn’t compound any interest towards the six-month moratorium period.

The United States of America

Though there is no official step by the American government regarding moratorium, some companies which give maximum house loans in America had offered to give the benefit of halting the home loan or repayment for up to 12 months. 

Italy

Italy, a country which is highly affected due to Corona had announced lockdown for the entire month of March and had even announced moratorium. The Associazione Bancaria Italiana (ABI) which is an Italy banking lobby had announced debt holiday to the lenders which are small firms and families. Italian banks own the biggest pile of non-performing loans- about 142 billion euros- among European Union countries, according to a Bloomberg report.

Britain

Britain on 23rd March 2020 announced that the commercial landlords must be precluded from forfeiting commercial lease and evicting the tenant for non-payment of rent. This is a very important step taken because such a moratorium would be very much helpful as the rents are very much high in Britain and this will be till the end of June and further dates will be looked into after settlement of this pandemic. And regarding another loan moratorium, it is expected to pay by the end of tenure. Many banks in Britain offered moratoriums for loans and mortgages to protect people so that they wouldn’t default. Some of the main lenders were the Royal Bank of Scotland, Lloyds and TSB, the Guardian. So there are many countries offering moratorium to help people in their country and to help the country as such. 

Moratorium in India by RBI

The Reserve Bank of India (RBI) has announced certain measures to combat the issue of burden of debt services during the COVID-19 pandemic to facilitate the easy transaction of business. The RBI has directed banks in India to give a moratorium period of three months for repayment of all term loans. It applies to payment of all instalments falling due in the period between March 1st, 2020 and May 31st, 2020. However, interest will continue to the accrue on the outstanding portion of the term loan. All term loans, including agricultural term loans, retail, crop loans and loans under pool purchase and cash credit/overdraft, come under the purview of this package.

The original repayment period for a term loan will get extended by 90 days. Usually, when there is a delay in payment it will lead to a default and will be reported to the Credit Bureaus. For business loans of Rs. 5 crores or more, the banks report the overdue position to RBI through Central Repository of Information on Large Credits (CRILC). With the introduction of this relief package, overdue payments post-March 1st, 2020 will not be reported to the Credit Bureau/ CRILC for three months. No penal interests or charges will be made payable to the banks. Also, Securities and Exchange Board of India (SEBI) has allowed that Credit Rating Agencies (CRAs) may not consider the delay as default by listed companies if the same has arisen owing to difficulties posed by the Corona Virus pandemic. 

To put this policy of the RBI into practice various banking institutions have revised their policies. Kotak Mahindra revised its policies and now all credit facilities of the bank outstanding as on March 31st, 2020 will be extended by a period of three months. However, this facility is not available to loan disbursements to made in April 2020 and thereafter. The bank has provided separate terms and conditions for different kinds of loans. Borrowers who wish to avail of this service must intimate with the bank about their desire within seven days ( or extension in the period which will be fixed by the bank) through a mail generated from their registered email id, from their first due date falling on or before April 1st, 2020. The revised policies of The Federal Bank Ltd states that the moratorium facility will be applied for term loans coming under the category of Business Loans, Retail Loans and Agricultural Loans which are outstanding as on 1st March 2020 with repayments either in instalments or bullets. It is applicable for instalments and interests payable between the period 1st March 2020 to 31st May 2020.

Deferred payment of working capital limits and relief under moratorium is extending to all Business loans up to Rs. 5Cr., Agricultural, Micro Lending and Gold loans. The bank has reached out to its customers through an SMS. If the customer’s wish to avail the facility, one has to send a reply to the generated SMS. A problem of availing this package is that the total amount of interest that gets accrued will be more than the total of interest that is payable per month for three consecutive months. This is because that interest will continue to accrue or add on to the outstanding portion of the loan. So only if you have a drastic decline in your cash flows should you avail this facility. One has to keep in mind that this is not a system of waiver of interest, but is a deferment of payment.

The banking institutions find it difficult to effectively dispense information regarding moratorium to the customers. With the advent of the internet, communication of information has become easier and faster. But Indian banking systems cater to all segments of the society, including those who may not have access to the internet. For such people, the traditional modes of dispatching of information must be carried out. With a drastic reduction in the manpower in branches, unless the customers themselves come to banks, which is not possible during a lockdown, banks face difficulty in reaching out to them. Moreover, the call centres also do not work efficiently due to lack of manpower.

These difficulties pose as a hurdle for not only gaining the consent of customers but also to make them aware about the technicalities behind moratorium, i.e., to make them aware that it is only a holiday for repayment of principal amount and that interest will be calculated during this period of holiday. Banks have made an effort to disseminate information to their customers by way of emails and SMS. But there lies the unanswered question of how many of them respond to these messages. Since most of the work is done from home owing to the current scenario, banks report that there may be a delay in submission of paper works concerning moratorium. Public sector banks like State Bank of India have given a blanket moratorium to all its customers. Banks in the private sector like Kotak Bank and Federal Bank have made it optional for the customers. 

Moratorium negatively affects small scale banks as they do not have a large number of credit and savings accounts, unlike a universal bank. These accounts take a lot of time to build and this is the reason why new banks fix higher rates of interest on Fixed Deposits. When there is an increase in short term assets, banks will increase the interest on Fixed Deposits. Most of these loans are secured by small financial institutions through fieldwork which has come to a halt in the prevailing circumstances. Although banks have resorted to e-banking facilities which help customers to borrow loans using Aadhar card, the size of micro-financial loans have increased which may give rise to delinquencies after the moratorium period and these small banks may not be in a position to effectively tackle the situation.

Suggestions

The facility of the moratorium is not compulsory. Rather it is a relaxation One has to keep in mind that moratorium does not mean a waiver in the amount due for payment. Rather it is just a period of the holiday for three months during which time interest will be accrued on the amount payable. The only positive impact is that this will not affect one person’s credit score. The interest which is payable after the period of moratorium often turns out to be more than what is one is required to pay if he/she does not avail of this facility. And just after the moratorium period ends one has to repay the full amount including the additional interest incurred, otherwise penalty/late payment charges will kick in, therefore there are two things to enquire about moratorium as far as a borrower is concerned:

• Is the RBI moratorium mandatory for all borrowers or optional? If the facility is optional it is better to repay the amount within the stipulated due date. If it is mandatory or if a person is going through a financial crunch, then one can avail this facility. This opens the gate for the next enquiry.
• Check with the concerned bank the details and conditions of a moratorium, especially the interest rate which will be applied and the timing of repayment. 
• RBI must look after that the interest rate for this loan holiday period must be less than the agreed interest rate as it might reduce the burden on the customer.

The impact of the moratorium on credit dues is more severe than on bank loans. Credit cards charge a much higher interest than other lending instruments. On a usual note, one can defer payment by paying 5% of the due amount and the remaining will be carried forward to the next billing cycle with 4-6% interest. But under the moratorium regime, if one does not pay the credit dues for three months and the bank decides to apply the normal rules on charging interest, then the total interest payable will be over 6-12%. Credit card dues get directly charged on the bill. Hence it is advised that even if one is drastically financially hit by the Pandemic, they should make sure that they pay at least the minimum dues in order to save themselves from future sharp shocks. 

Conclusion

It must be understood that at this time of pandemic when the whole world is attacked, the IMF and World Bank came with few benefits for mainly the low-income, developing countries and most of the National Banks also came forward to give benefits for debtors. The Moratorium, which is a holiday on repayment of outstanding debts, is without any doubt beneficial to the creditors and banks. But how far it is beneficial to the customers is a relevant question that has been considered through this paper. Our suggestions would be helpful for both banks and the debtors. Sufficient efforts must be taken to ensure that the customers are well informed about the pros and cons of the moratorium system so that they are able to make proper and informed decisions. At this stage of a pandemic, the need of the hour is to do a combined battle against the common enemy and work for hand in hand to help those who are suffering economic loss and ultimately help the country as a whole. 

References

• Rishikesh Ramesh, “Impact of Bank Moratorium- Is NBFC Pandemic to Indian Economy?”, Tax Guru, 17 April 2020, available at https://taxguru.in/rbi/impact-bank-moratorium-nbfc-pandemic-indian-economy.html (last visited on 18/04/2020).
• Shweta Punj, “Coronavirus: What does moratorium mean for your EMIs”, India Today,3 April 2020, available at https://www.indiatoday.in/business/story/coronavirus-what-does-moratorium-mean-for-your-emis-1663077-2020-04-03 (last visited on 09/04/2020).
• Priyadarshini Maji, “RBI Moratorium on EMIs: Kotak Bank revises its policy for borrowers; Here is all you need to know”, Financial Express, 2April 2020, available at https://www.financialexpress.com/money/rbi-moratorium-on-emis-kotak-bank-revises-its-policy-for-borrowers-here-is-all-you-need-to-know/1916018/ (last visited on 08/04/2020).
• Moorad Choudhry, Introduction to Credit Derivatives, (John Wiley & Sons, Burlington, 1/2004).
• The World Bank,“World Bank Group Increases COVID-19 Response to $14 Billion To Help Sustain Economies, Protect Jobs”, 2020, available at https://www.worldbank.org/en/news/press-release/2020/03/17/world-bank-group-increases-covid-19-response-to-14-billion-to-help-sustain-economies-protect-jobs (last visited on 03/04/2020).
• International Monetary Fund, “IMF Enhances Debt Relief Trust to Enable Support for Eligible Low-Income Countries-in-the-Wake-of-the-COVID-19-Pandemic”,2020, available https://www.imf.org/en/News/Articles/2020/03/27/pr20116-imf-enhances-debt-relief-trust-to-enable-support-for-eligible-lic-in-wake-of-covid-19 (Last visited on 03/04/2020).
• International Monetary Fund, “IMF Enhances Debt Relief Trust to Enable Support for Eligible Low-Income Countries-in-the-Wake-of-the-COVID-19-Pandemic”,2020, available https://www.imf.org/en/News/Articles/2020/03/27/pr20116-imf-enhances-debt-relief-trust-to-enable-support-for-eligible-lic-in-wake-of-covid-19 (Last visited on 03/04/2020).

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