Despite RBI’s Instructions, Moratorium Extension Hits Credit Score of Borrowers

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Despite RBI’s Instructions, Moratorium Extension Hits Credit Score of Borrowers

This is what happened when borrowers availed of a moratorium on loans during COVID-19.

Borrowers across the country are complaining that their credit score took a hit after availing moratorium on loans during COVID-19. The official statement is yet to be released.

Here is what we know so far:

On 27th March 2020, the Central Government announced a few relief measures to deal with COVID-19. This included the mandate to extend the moratorium on loans by three months effective from 1st March 2020 to 31st May 2020 for all eligible borrowers.

As per this announcement, the borrower – facing a cash crunch because of the novel coronavirus pandemic – got relief from paying EMIs towards loan repayment. Penal interest arising out of non-repayment of the loan was also not to be charged. The credit score was also not supposed to be affected. But, interest was supposed to accrue during the moratorium.

The next announcement came in on 22nd May for the extension of the loan moratorium effective from 1st June to 31st August. Everything else applied as before.

RBI asked banks to offer moratorium, extension to all eligible borrowers. However, most banks did not offer it to everyone. They allowed only certain customers to opt for moratorium. The reasons were valid. One reason was the extension being available only for long-term loans and not short-term ones as giving it for shorter loans would disrupt the ‘credit discipline’ of borrowers.

Looking at this scenario, the recent the Central Government announcement that the moratorium period can be extended by 2 years may find few takers.

Whatever be the larger scenario, on a personal level, it came as a shock to many people when they saw that their credit score had taken a hit, in many cases of 100 points, after availing the moratorium on loans. It may seem the credit rating agencies did not do anything to their software and credit rating calculation despite the government order. It may be the right thing to do as those among us who paid the loan EMIs should have some credit rating or other positive note to their name to separate them from those who of us took the moratorium. But considering the larger situation, one may argue that it may be better to see it as more of an academic question. But the question has relevant practical long-term implications and needs to be addressed to prevent any imbalance.

The credit bureaus are yet to publish a statement on the issue.

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