Moratorium

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Moratorium refers to an interim arrangement to prevent undue hardships caused by any crisis, financial or otherwise. A moratorium may be imposed as between contracting parties in a business contract or by the government ordering temporary suspension of particular activities. Similarly, a moratorium may also be directed by any regulatory department, such as the Reserve Bank of India.

Understanding Moratorium

A moratorium includes temporary relaxations from enforcing collection of interest on loans, taxes pursuant to assessment proceedings, and imposing penalties on delayed payments. The moratorium, in general, removes financial hardships temporarily. Legal proceedings may also be put under moratorium to suspend all legal action temporarily.

In a crisis situation, such as the recent spread of coronavirus or COVID-19, in India, all banks have put a moratorium on collection of loan instalments and payment of interest. The bank customers have an option to pay the instalments and interest later, at the end of the deferment period.

The Indian government has suspended the collection and recovery proceedings under various tax laws during the deferment period. Similarly, the statutory due dates for the compliance under corporate law and indirect and direct tax law are deferred by three months. Various countries of the world have similarly put a moratorium on tax and regulatory compliance, tax collections and others.

A moratorium may also be placed by a business organisation. During a financial slowdown, businesses may change their policies to conserve cash. For example, in a financially stressful period, the organisation may put a moratorium on hiring people or the payment of bonus. The period of the moratorium could be six months or could be one year.

Conclusion

A moratorium is generally a response to a crisis which disrupts normal business activities or normal routine of the public. Moratorium provides financial relief; and eases liquidity pressure on households, businesses and others affected by the crisis.

Likewise, the government may also reduce its discretionary expenditure or redirect expenditure to provide financial or medical relief. A moratorium is removed when the public or business can resume their normal routine.