Moratorium is the term used to refer to the stage or period in a loan repayment schedule in which no repayment is made or interest paid; however, interest is accrued during the period. At the end of the period the accrued interest is capitalized and the regular period schedule is drawn up by the FCR.
A moratorium is typically introduced in the beginning of the loan term. However, for ‘EPI – Beginning of Period Type of Loans’, Moratorium is not allowed as a stage at the beginning or in between the loan term. The schedule is always validated for the disbursed amount as well as sanctioned amount.
Moratorium is one of the installment rules. There is no penalty charged during the moratorium period because no arrears are raised. The original rate of interest can be found out from the database where it is stored.
Moratorium was originally introduced in student loans because students could not repay the loan during the time they were studying and it would not be right to expect them to. Therefore, moratorium was a good solution. However, gradually this concept began to be applied to other categories of loans too to suit various situations.
During Moratorium, the borrower still owes the loan amount. Therefore, FCR needs to deal with the situation such that the amount is recovered in some way without causing inconvenience to either the bank or the borrower. FCR deals with it in either of the following two ways:
1. The interest continues to be accrued until the end of moratorium and once moratorium is over, it is capitalized.
2. The interest is not accrued at all during moratorium and starts accruing only after moratorium ends. In this case, the interest rate for the moratorium period is set 0. However, because of this, the system is unable to report on how much interest income has been waived.
Similar concepts:
Deferment, postponement and interest freeze are concepts that are closely related to moratorium but not synonymous.
Deferment:
In earlier version of FCR, deferment was a concept exactly similar to moratorium and there was no such thing as moratorium. Therefore, in some FCR installations, there maybe still the term deferment that means the same as moratorium.
Postponement refers to the postponement of repayment of a loans installment. This may be because of personal problems such as lay-off from employment or hospitalization and so on. In such a case, the borrower wants to postpone the repayment. FCR takes care of this situation by levying a fee and asking the borrower to pay both the installments together on the next due date.
Interest freeze on the other hand, comes into the picture with regards to bad loans or defaulters. In case of bad loans, the bank’s collections department decides to sell off the collateral to recover whatever they can. In such a situation, the bank imposes an interest freeze on the account. This is to stop the reporting of interest income at this income will never be recovered in any case( this can also be achieved through a moratorium or postponement but moratorium/postponement is applicable to loans that have not been declared as bad).