A loan moratorium gives borrowers temporary relief from making scheduled loan payments, but it does not normally cancel the loan or the interest payable on it. This distinction became especially important during the COVID-19 period, when the Reserve Bank of India (RBI) allowed banks and other regulated lenders to provide a temporary moratorium on loan instalments.
Many borrowers still confuse a loan moratorium with an interest waiver. RBI’s rules did not provide a general waiver of normal loan interest. Instead, borrowers were allowed to postpone certain payments, while separate relief was later provided against the additional burden of compound interest or “interest on interest.”
Here is how the rules actually worked and what they mean for borrowers.
What Is a Loan Moratorium?
A loan moratorium is a temporary period during which a borrower is permitted to postpone scheduled payments such as EMIs.
During the COVID-19 crisis, RBI initially permitted lending institutions to grant a three-month moratorium on instalments falling due between March 1, 2020 and May 31, 2020. The relief was subsequently extended for another three months, taking the total eligible period to March 1, 2020 to August 31, 2020.
The relief covered term loans provided by banks, co-operative banks, financial institutions and NBFCs, including housing finance companies.
However, the important point was that the moratorium postponed repayment. It did not automatically make the loan interest-free.
Did RBI Waive Interest During the Moratorium?
No. RBI’s original moratorium guidelines clearly provided that interest would continue to accrue on the outstanding portion of term loans during the moratorium period.
Therefore, a borrower who postponed EMIs continued to incur normal contractual interest on the outstanding loan.
Depending on the loan and the lender’s repayment arrangement, this accumulated interest could result in:
- an increase in the outstanding loan amount;
- a longer repayment tenure;
- higher subsequent instalments; or
- another repayment arrangement agreed with the lender.
This is why a moratorium should not be understood as six months of free loan repayment.
What Was the “Interest on Interest” Waiver?
The major relief introduced later concerned compound interest, commonly called “interest on interest.”
When interest accrued during the moratorium and was added to the outstanding amount, additional interest could effectively become payable on that accumulated interest. This created an additional financial burden.
The government introduced an ex-gratia relief scheme covering the difference between compound interest and simple interest for the six-month period from March 1 to August 31, 2020 for specified categories of eligible borrowers.
The scheme initially covered loan accounts of up to ₹2 crore in categories including:
- MSME loans;
- education loans;
- housing loans;
- consumer durable loans;
- credit card dues;
- auto loans;
- personal loans to professionals; and
- consumption loans.
Importantly, eligible borrowers could receive this benefit whether or not they had actually opted for the moratorium.
What Did the Supreme Court Decide?
The issue eventually reached the Supreme Court.
In its judgment dated March 23, 2021, the Court dealt with demands for complete waiver of interest, waiver of compound interest and extension of the moratorium.
The result was not a waiver of normal contractual interest for the entire moratorium period. Instead, relief was extended regarding the charging of interest on interest or compound interest during the six-month moratorium period.
Following the judgment, RBI instructed lending institutions to put in place a Board-approved policy to refund or adjust interest on interest charged for the period from March 1, 2020 to August 31, 2020.
The RBI clarification made this relief applicable to borrowers irrespective of whether they had:
- fully availed the moratorium;
- partially availed it; or
- not availed it at all.
Was the Entire Loan Interest Waived?
No. This remains one of the most important points for borrowers.
The relief did not cancel ordinary interest charged on the loan principal.
For example, suppose a borrower had a home loan and stopped paying EMIs during the permitted moratorium. The normal interest applicable under the home loan agreement continued to accrue.
What was subsequently required to be refunded or adjusted was the additional interest-on-interest component, subject to the applicable rules.
Therefore:
Moratorium = postponement of payment
Interest waiver relief = relief mainly from the additional compound-interest burden
They are not the same thing.
Did Using the Moratorium Make a Borrower a Defaulter?
The COVID-19 moratorium was regulatory relief and was not supposed to be treated in the same way as an ordinary repayment default during the protected period.
RBI’s measures provided corresponding relief regarding asset classification during the applicable moratorium period. After the special regulatory period ended, however, normal loan repayment and asset-classification rules again became applicable.
Therefore, borrowers could not continue withholding EMIs after the permitted period merely because they had earlier received moratorium relief.
Is the COVID Loan Moratorium Still Available in 2026?
No. The six-month RBI COVID-19 moratorium covering March 1 to August 31, 2020 was an extraordinary temporary regulatory measure. It is not a continuing general moratorium available to all borrowers today.
RBI also introduced subsequent COVID restructuring frameworks under which eligible stressed borrowers could receive measures such as rescheduling, extension of loan tenure or a moratorium as part of an approved resolution plan. Those were also time-bound frameworks rather than a permanent right to stop paying EMIs.
Today, any moratorium available on a normal loan generally depends on the loan product, sanction terms, lender’s restructuring policy or a specific regulatory relief measure applicable to that borrower.
Can a Bank Charge Interest During a Normal Moratorium?
A moratorium does not automatically mean that interest stops.
Unless the loan agreement, lender’s scheme or a specific RBI/government relief measure expressly provides an interest waiver, interest may continue to accrue during the moratorium period.
Borrowers should therefore check three things before accepting any moratorium:
- whether normal interest will continue;
- whether the accumulated interest will be added to the loan principal; and
- whether the EMI or loan tenure will increase afterwards.
These points determine the real cost of taking the repayment holiday.
What Should You Do If the Interest Calculation Appears Wrong?
First obtain the loan statement and repayment schedule from the lender. Check the principal outstanding, applicable interest rate, interest charged during the moratorium and any adjustments already provided.
If there appears to be an incorrect charge, raise a written complaint with the bank or NBFC and retain the complaint number and supporting documents.
Under the Reserve Bank – Integrated Ombudsman Scheme, 2026, a customer can approach the RBI Ombudsman where the regulated entity has failed to resolve an eligible service-related complaint satisfactorily. Normally, the borrower must first complain to the lender before approaching the Ombudsman.
Key Points to Remember
A loan moratorium gives temporary repayment relief; it does not normally erase interest.
Under RBI’s COVID-19 moratorium, EMIs falling due between March 1 and August 31, 2020 could be deferred, but normal interest continued to accrue.
The later relief mainly addressed compound interest or interest on interest, rather than cancelling the entire interest payable on loans.
The special COVID moratorium is no longer an active blanket facility. Any moratorium available today has to be determined from the specific loan agreement, restructuring arrangement or regulatory scheme applicable to the borrower.
FAQs
Q1. Can I ask my bank for an RBI moratorium on my loan today?
There is no general COVID-style RBI moratorium currently available to every borrower. You may, however, request restructuring, rescheduling or temporary repayment relief from your lender if its policy and your circumstances permit it.
Q2. Does a moratorium stop interest from being charged?
Not necessarily. In most cases, interest continues during the moratorium unless the applicable scheme specifically provides an interest waiver.
Q3. Was home loan interest completely waived during the COVID moratorium?
No. Normal interest on the outstanding home loan continued to accrue. The later relief concerned the additional burden arising from interest on interest.
Q4. Was the interest-on-interest benefit available only to people who took the moratorium?
No. RBI’s April 2021 instructions stated that the refund or adjustment relief applied irrespective of whether the moratorium had been fully availed, partly availed or not availed.
Q5. Can taking a moratorium increase the total cost of a loan?
Yes. If interest continues during the moratorium and is added to the outstanding balance, the total interest payable or loan tenure can increase. Borrowers should check the revised repayment schedule before accepting such relief.
