What is Moratorium?

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Moratorium 

Meaning- A moratorium is a temporary suspension of an activity or law until future consideration warrants lifting the suspension, such as if and when the issues that led to moratorium have been resolved. A moratorium may be imposed by a government, by regulators, or by a business.

Moratoriums are often imposed 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 during bankruptcy proceedings.

But it has other meanings too-
A Moratorium on loan is a specified period during which the borrower is not obligated to make EMI payments of their loans as mandated by the Reserve Bank of India. The moratorium period in loan postpones repayment and gives the borrower a grace period during which they can choose to not make EMI payments for a loan. Apart from the Moratorium on Loan, which was recently provided as a relief post the COVID-19 pandemic, it has been widely used for some types of credit such as education loans to borrowers who require a certain grace period before they can start repaying the loan. 

Examples of Moratoriums
As an 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.

On the voluntary side, insurance companies will sometimes issue moratoriums on writing new policies for properties located in specific areas during the course of a natural disaster. Such moratoriums can 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 unusual outbreak of wildfires.

How Moratoriums Work

A moratorium is often, though not always, a response to a short-term crisis that disrupts the normal routine of a business. For instance, in the immediate aftermath of a natural disaster like an earthquake or flood, an emergency moratorium on some financial activities may be granted by a government. It will subsequently be lifted when normal business can commence once again.

If a company is experiencing financial difficulties, it can place a moratorium on certain activities to lower costs. The business may institute a hiring freeze, limit discretionary spending, or cut back on company travel and non-essential training. Moratoriums of this nature, designed solely to reduce unnecessary spending, are not meant to interrupt a business's ability or intent to repay its debts or to meet all necessary operational costs. They are instead taken to alleviate a financial shortfall or avoid default on debt obligations. The voluntary moratorium is a vehicle to bring spending back in line with current company revenues.

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. This type of moratorium is typical in Chapter 13 bankruptcy filings in which the debtor seeks to restructure payments of outstanding debts.

If a better explanation can be given in terms of loan it will be like this-

How Does a Moratorium Period Work?
Normally, a moratorium period starts as soon as a loan is approved. It is mostly extended to allow the borrower more time to organise their money and get ready to repay the loan. A loan’s middle stage also has a moratorium period where the lender permits the borrower to stop making payments for a specific reason – for instance, financial hardship over a predetermined length of time. It should be remembered that the loan’s interest typically builds up throughout the moratorium.

Moratorium Example
An individual takes out a loan and has an Rs.5000 monthly payment but the person’s financial situation worsens to the point that they are no longer able to pay Rs.5000, they call their bank and request a suspension of the loan instalments. The bank consented to a six-month moratorium during which the person would not be required to make any payments.

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