Within six months of getting a job, Vibhav Kini (name changed) bought a car. The loan was easily available and for the downpayment, he borrowed from a friend. Initially, he was able to manage the equated monthly instalment (EMI) and his monthly expenses. However, over the past one year, his salary has remained the same and he didn’t get any bonus. The EMI increased as the bank raised interest rates and his monthly expenses shot up, too, due to inflation.
Kini spoke to his bank and the repayment period on his loan was increased from five years to seven years. This brought down the EMI, providing him relief, and he was able to escape the tag of a 'defaulter'.
Faced with rising instances of defaults, banks are stepping up recovery processes. According to V N Kulkarni, debt counsellor, loan documents contain a clause which says that in the case of a default, banks can publicise photographs of the borrower. "This acts as a deterrent for others not to default on their loans,'' he says.
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Apart from the humiliation, being labelled a defaulter will make it difficult for you to borrow again, since banks now rely heavily on past records of borrowers before approving a loan. If you are labelled a defaulter, it will require diligent follow-ups with the bank to set the record straight, even if you’re subsequently repaying on time.
Since there is no policy with regard to rescheduling or re-phasement of retail loans, it is done at the discretion of individual banks. Borrowers can approach their respective bank and request an extension of the repayment period and a lower EMI, within their capacity. Or, if the customer has a good record and has missed two instalments, the bank might get in touch and advise him to make the third repayment on time to avoid default or to reschedule the loan.
"Borrowers must remember that when the period is extended, the interest amount will go up,'' Kulkarni says.
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B Vara Prasad, general manager, retail, Union Bank of India, says for rescheduling a loan, banks will look at cash flows and the security or collateral provided. "The reasons for rescheduling have to be acceptable. The bank has to be convinced that the problem is genuine,'' he says.
For instance, if there is a temporary and unexpected outflow of cash, non- recurring in nature, the bank would generally reschedule the loan. Rescheduling will not affect the borrower's credit history or rating. So, it is better to go for restructuring than face a default, says D Sampath, head, retail, Federal Bank. "Credit history is affected only if the amount due to be paid is not paid. Here, the amount is reduced. So, there is no impact,'' he says.
In the case of home loans, banks will extend the original tenure by five years, up to a maximum of 25 years. So, if your home loan is for 20 years, you can extend it to 25 years and reduce the monthly repayment. In the case of car loans, banks will generally allow up to a maximum of seven years to repay.
The retail head of a public sector bank says, "While taking possession of the car is an option, we don't prefer it because the car is a depreciating asset. So, if we do go to court, we may also request the court to attach other assets of the customer or the guarantor. Hence, it is neither beneficial to us for to the customer.''
In some cases, the bank might also write to the employer of the borrower, to put moral pressure on the latter to repay on time or reschedule the loan.
For educational loans, there is already a moratorium of 1.5 to three years (the time after which the loan repayment starts). In some cases, banks do allow the repayment period to be extended by two to three years. "We will allow it only if we are convinced the student is capable of securing a well-paying job,'' says Vara Prasad.
Some banks allow clean loans (without collateral) like personal loans and credit loans to be consolidated and repaid over a period of time. But, only if both loans are from the same bank. Kulkarni says, "Home loans and car loans are secured loans and the interest rates are much lower. So, it is not possible to consolidate these with other loans.''