Loss of Job, medical emergency or may be anything which makes you unable to pay your Home Loan EMIs will not be the acceptable reasons for banks not to take any action against you to recover their money unless you have made required provisions to make the payments. Normally Home Loan EMIs stands on an average of 35%-40% of your take home pay. Imagine in any adverse situation where you have no monthly income and no savings then how these payments can be made after meeting your basic household expenses.
So what should you do if you fall under the same situation where no option to pay the EMIs on time for a big period? There are a number of things you can do to get back on track. It’s important that you do not ignore the issue as it will only make things complicated. Remember! Bank follows certain procedure/rule with regards to recovery of due.
Banks or financial institutions do not want to attach one’s property and this is the last option left with them. They always want to negotiate. They need to enforce Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) to recover Non-Performing Assets (NPA). Banks generally reminds the borrowers about the last payment or misses the EMI. They mail or phone you about this. After three months default of non-paying the EMI, bank will send a demand notice to the borrower asking him/her to pay the dues as soon as possible. If the borrower doesn’t entertain the mail or phone by the bank and also doesn’t pay the dues, bank will send a legal notice through legal department. After the legal notice send to the borrower, bank will wait for the next three months before declaring it as non-performing asset.
After declaring the asset as non-performing asset, bank can start the process of recovering the property through the SARFAESI act. Even after acting this act, bank will give the borrower 2 months time notice to clear the dues.
It means it will take around 5 months from the first default when the bank send a notice to the borrower that it has valued the property from the valuer and the auction will take place on particular date. The auction date is also a month late from the notice date.
So the matter is simple. Banks are more keen to recover money from the borrower than from legal procedure and from auction because it is a very timely process and may take time as well as loss. Banks need to wait at least 6 months to start recovery proceedings to take the property as attached.
So as a borrower what should you do? First you need to engage in a discussion with your bank/financial institution. Based on how genuine your case and intent is, banks may look for various feasible solutions that are mutually acceptable. Have a file containing all your mortgage payments history which can probably convince your bank that you have been a good consumer who has been forced to default due to circumstances beyond your control.
Steps to be taken if you miss the EMIs
Get in touch with your Lender: If you are unable to pay your EMIs on time, contact your lender as soon as you know that you will have trouble in meeting the repayment schedule. If you are serious about paying your dues and have a good repayment track record, the bank will be willing to offer you some leeway. If you have lost your job and you are able to convince the lender that you will get back one very soon that also helps. You can also ask bank to restructure your loan by either reducing the EMI or apply for a loan conversion.
Use other Financial Assets: If you see there is nothing happening out of conversation you can pledge/mortgage other financial assets you have and obtain a new loan against them to pay-off your loan to some extent. Exiting investments into mutual funds, Equity or partial withdrawal from insurance/ULIP policies can be an option. But one thing you should know, this is just a temporary solution. Loan against other financial assets will only increase your liabilities.
Seek advice from Experts: You should share this matter with your financial planner/advisor without any hesitation. In fact this you should do at the very first stage. Remember! Your financial planner/advisor cannot make the EMI payments on your behalf, but at least they will be helpful in finding less painful ways to get rid of the situation once it’s discussed with them.
Obviously, the best solution would be to not get into this situation in the first place. So always plan in advance. You should look at setting aside some amount of income surplus on a regular basis. Try to accumulate nothing less than 3-4 months EMIs so that you will have enough time for a Plan B if such unforeseen contingency comes up.
It is always advisable to take mortgage insurance which covers such contingencies. This provides a cover for loss of job due to due to retrenchment, layoff or health reasons etc. Here the insurance company will take care of the EMIs for three months from the date that you lost your job. Such insurance also cover major medical illnesses, death and permanent total disability due to accident etc.
Conclusion: It’s you who have taken the loan from the bank, it is your duty to return it with the interest. Do not let the situation becomes worst so that bank hands over your account to a recovery agency. Banks have every right to go after you and recover the due loan amount. You cannot escape this. Thus communication is the key here and any lie or miscommunication can complicate the issue further. While there are times when situation is not in your control and you have to default, but there is no excuse of not informing banks about your situation and find out a common solution.
Last, reduce your expenses if you are already burdened with loan EMIs. This one step will do immense good to you, not only to overcome this problem, but also for future financial security.
P.S. RBI has issued clear guidelines on debt collection practices. The guidelines clearly states that the collection agent cannot harass you mentally or physically, cannot call you at odd times, and banks are responsible for any misdeeds of recovery agents. Read here for the RBI guidelines.