The word Moratorium meaning could be different to different people.
Here is what you should know :
It means suspension of activity for a certain period, while the dictionary also explains it as the “legally authorized period of delay in the performance of an obligation.” This word can have different meanings for different people, but has the same sense of waiting period by an authority and a temporary halt of how things are normally supposed to be done.
For example, a moratorium is in place on the death penalty in some countries, meaning that the inmates on death row will not be executed until the end of the moratorium period, which can be extended anytime. A company can place a moratorium on increasing salaries and hiring new employees, meaning for a certain time salaries won’t be increased and no new employees will be hired. In the financial world, however, a moratorium refers to a deferral in payment of a debt by the creditor, may it be an individual or a financial institution.
A moratorium period on repayment of debt is normally introduced due to financial hardship resulting from a genuine natural calamity. For instance, due to the gap in cash flow created by the pandemic all over India, the Royal Bank of India (RBI) introduced a moratorium period of three months on all installments on which failure of payment occurred from March to May 2021. That means no borrower should be declared a defaulter if any installment/repayment of any loan is within this moratorium period.
It’s a crucial term to be understood by small to medium business owners, investors, and borrowers (like credit card users), because it eases the financial hardship temporarily by taking away the hanging sword of loan repayment. Otherwise, default not only results in a negative credit history (creating serious problems for any future borrowing) but also leads to increased costs in the shape of late payment penalties and interest/mark-up rates. A moratorium period by a financial authority helps all borrowers affected by any recession (like COVID-19 nowadays) to not worry about repayment and keep their credit history untainted even after missing a few dates.
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