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As we have seen in the past, every 100 years there is one pandemic in whole or any part of the world resulted killing of millions of people. Say in the 1720 the great Plaque of Marseille in France has killed more than 10 million lives. Again the first Cholera Pandemic (1817-1824) also known as the first Asiatic Cholera Pandemic, began near the city of Calcutta and spread throughout the Southeast Asia have killed millions of lives. The Spanish flu, also known as the 1918 Flu Pandemic, was an unusually deadly influenza pandemic lasting from 1918 to 1920 have killed more than 50 million lives. The COVID-19 Pandemic started its first case in Wuhan city capital of Hubei province of the People’s Republic of China in the last part of 2019 and till date it continues spreading the dreadful diseases all over the world.
The pandemic has severely affected the day to day normal lives of human being in this highly information technology era. Since December 2019, the pandemic has been spreading on its peak of which few countries have started its declining trend and few more countries are on rise. As of today, it has covered more than 213 countries and has killed more than 7,47,845 person and carrying positive cases of more than 20,550,481million spreading all over the world including India which has killed more than 46,091 and confirm positive cases of more than 23,29,638 according to the Johns Hopkins University report as on August 13, 2020.
To control this pandemic, in India from 25 March 2020 the first phase of Lockdown imposed was by the government in the entire country. And now we have completed fourth phase of lockdown and fifth phase started from 1st June till 30th June as Unlock phase. During these phases all the economic activities of the country irrespective of size, nature, and geographical region has affected totally. All manufacturing, services and trading organisation have been shut down and stopped its economic generation activities. Does it have direct impact on the economies of the world?
The so call lockdown has not only severely affected the entire economy, but also affected the health care services, financial services and education sector too of a country. Further, it also affected to those micro, small borrowers and farmers who had borrowed from the bank and financial institutions, microfinance institutions, Self Help Promotion institutions and local money lenders for investment into their micro and small enterprises and other economic oriented activities. Indirectly it also affected to micro lending institutions such as SHGs promotion institutions, microfinance institutions, NBFCs, regional rural banks, private banks and commercial banks and other financial institutions operating in the country. Because, these financial institutions are not issuing currencies rather they are borrowing from central banks, commercial banks for further lending to needy micro, small enterprise and farmers.
To ease this financial difficulties faced by the micro, small borrowers and farmers, as a relief measure for people in view of the coronavirus pandemic, the Reserve Bank of India (RBI) allowed a three-month moratorium on term-loan and credit card repayments at the first phase starting from March 2020 and later extended another three month till 31 August 2020. Lending institutions were directed to defer the EMIs collections of their customers opting for this moratorium scheme.
Now a big question arises among the micro, small enterprise owners, farmers and other borrowers in the country is that whether they need to pay the interest during this moratorium period or not? Even some of them are with the impression that they may get the exemption of loan too. Keeping this in view, the country’s highest judicial institution Supreme Court has sought clarification on why interest should be charged during this present moratorium period from borrowers.
In response to this doubt, study of the following points must be useful to the readers, especially the micro, small enterprise, farmers and other borrowers to know about what is a financial moratorium and how does it work? Let’s take a look.
What is a Moratorium?
A moratorium is often affected in response to a crisis that disrupts normal routine. In the aftermath of earthquakes, floods, droughts or disease outbreaks, an emergency moratorium on some financial activities may be granted by a government or the central bank. It is lifted when normalcy returns. Further, it is a temporary suspension of an activity or a law until future events warrant lifting the suspension or related issues have been resolved. A moratorium may be imposed by a government or by a business.
Moratoriums are often enacted in response to temporary financial hardships. For example, a business that has exceeded its budget might place a moratorium on new hiring until the start of its next fiscal year.In legal proceedings, a moratorium can be imposed on an activity such as a debt collection process. The moratorium will be lifted when a related issue is resolved.
In India, moratorium can be extended by any commercial bank, including regional banks, rural banks, and small finance banks. It can also be offered by cooperative banks and non-banking financial companies (NBFCs). Any all-India financial institution can also offer the moratorium.
Now from the above paragraphs it is clear that the moratorium is neither giving any financial assistance nor waiving of interest and EMI from the borrower. It is simply giving suspension of collection of interest and capital till the related issues have been resolved. For example, the RBI has announced a moratorium of 3 month from 1 March to 31 May 2020 initially keeping in view that the COVID 19 cases will resolve by the end of May 2020. However, looking at the increasing trend of COVID-19 positive cases, another 3 months moratorium terms has been extended till 31 August 2020 so that micro and small borrowers can get relief in deferment of payment of interest along with EMI till 31 August 2020. Here, there is no question of giving any financial assistance and waiving of interest and EMI for these periods of 6 months. Since the 31 August is knocking at the door and there is sign of decline in spread of Pandemic, there is quite possibility that the Central bank of the country may further extend the period of financial moratorium with another phase.
Historical aspects of Moratorium
A moratorium is a temporary suspension of business as usual.Most of the time, moratoriums are intended to alleviate temporary financial hardship or provide time to resolve related issues.In bankruptcy law, a moratorium is a legally-mandated hiatus in debt collection. For example, in 2016, the governor of Puerto Rico issued an order to limit the withdrawal of funds from the Government Development Bank. This emergency moratorium established a hold on withdrawals that were not related to bank principal or interest payments in order to reduce risks to the bank's liquidity.
The Moratorium to End the War in Vietnam was a massive demonstration and teach-in across the United States against the United States involvement in the Vietnam War. It took place on October 15, 1969 followed a month later on Saturday, November 15, 1969, by a second massive Moratorium march in Washington, D.C., which attracted over 500,000 demonstrators against the war, including many performers and activists.
Insurance Companies moratorium: Insurance companies often issue moratoriums on new policies for properties in specific areas during the course of a natural disaster. Such moratoriums help mitigate losses when the probability of filed claims is abnormally high. For example, in February 2011, MetLife issued a moratorium on writing new policies in many Texas counties due to an outbreak of wildfires.
YES Bank moratorium: On March 5, 2020, the RBI imposed a 30-day moratorium on YES Bank. Under the terms of the moratorium, deposit withdrawals by customers of the bank during this period were capped at Rs 50,000 per person.
In bankruptcy law, a moratorium is a legally binding hiatus in the right to collect debts from an individual. This time-out period protects the debtor while a plan for recovery is agreed upon and put in place. If a company is experiencing financial difficulties, it can place a moratorium on certain activities to lower costs. The business may limit discretionary spending or cut back on company travel and non-essential training.
Moratoriums of this nature, designed solely to reduce unnecessary spending, do not affect a business's intent to repay its debts or to meet all necessary operational costs. They are taken to alleviate a financial shortfall without the need to default on debt obligations. The voluntary moratorium is a vehicle to bring spending back in line with current company revenues.
What is a moratorium period?
Dr.A.Rajmani Singh
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