Home loans are paid in instalments which are commonly known as Equated Monthly Instalments (EMI). These are fixed amount which is expected to be paid by the borrower to the bank every month as a part of loan repayment. A bank considers a home loan to be in default when the borrower fails to make a payment and is behind by 90 days. In such a case, the borrower would have missed three payments of EMI.
When the home loan is in default, banks do not seize the assets of the borrowers immediately. They send a notice to the borrower stating that the EMI payment has been missed and strict action will be taken in this regard. Banks are ready to understand the various reasons behind non-payment of the EMIs, which might include financial crisis, accident, etc. if the borrower approaches the bank with an explanation.
Once the reason is conveyed by the borrower or is otherwise evident to the lender, the bank restructures the EMI and extends the loan tenure on the request of the borrower. This would help the borrower to repay the EMIs on time, and banks will not have to auction the property. Only in extreme cases will the property be sold by the bank. If the property of the borrower is sold within a span of three years of acquisition, then the borrower can expect to receive a profit on the sale. However, if the property is sold after three years, the borrower can take the benefit of tax exemption.
When does a home loan become an NPA?
Bank considers a home loan to be a Non-Performing Asset (NPA) when the borrower, in a period of 90 days, is unable to pay back the principal amount and the interest. When a home loan becomes an NPA, the bank might ask the borrower to pay the complete home loan amount. To recover the home loan, lenders sell or seize the assets or mortgaged property of the borrower. This is an authority for lenders given under the SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act) to protect their interests.
Banks usually do not go to the stage of selling of property and try resolving the case by understanding the reason behind non-payment of EMI and further ease the process of repayment to the borrowers. Only in certain extreme cases, the property is sold by the bank.
Proceedings by a bank in taking the property of the borrower into their possession and disposing of it are undertaken under the guiding factors of SARFAESI Act. These proceedings begin when the account of the borrower is considered as NPA if the EMI is not paid by the borrower. In this case, lenders issue a 60-day notice to the borrower. This notice is usually a reminder to the defaulter stating the issue of not paying EMI for three months consecutively.
In case the defaulter is non-responsive even during the notice period, then the bank goes ahead with the sale of the mortgaged property of the borrower. During this period, the borrower can resolve the issue or raise an objection to the notice. Banks specify the fair value of the borrower’s property before proceeding to its sale, and the borrower can raise an objection if the property is undervalued or if he proposes an alternative to the bank to get back the amount provided as a loan.
Another notice period of 30 days must then be served by the bank to sell the property, and the subsequent notice should include the specifications and details of the sale. Later the property is disposed and the amount is recovered.
How to overcome home loan debt distress
To overcome the debt distress, borrowers can negotiate with the lenders and resolve it. Borrowers can reach out to the banks with their previous bank records of repaying the loans on time and try convincing them. Borrowers can explain the reason for not paying on time with valid reasons like an accident, financial crisis or loss of job and ask for a grace period to pay back. In certain cases, the interest rates might have gone up unexpectedly and become unaffordable to the borrower.
In such a scenario, the borrower can ask the lender to refinance the home loan. This will lead to lower EMI but increase in the tenure period. If there are other assets with the borrowers such as fixed deposits or mutual fund investments, they can be liquidated and the debt can be repaid. Apart from all this, borrowers themselves can sell their property and pay back the amount instead of banks taking over it and selling.
Planning (to not fail)
To avoid repayment default and financial distress, home loan borrowers need to wisely pre-plan and analyze a few things in advance. The monthly outgo in the form of EMI should not be more than 50% of the monthly income. The loan tenure should be as short as possible, as this will lead to lower interest payments. Financial management must be done by the borrower for timely and regular payment of the EMI. The credit score is impacted if an EMI payment is missed, which impacts the credit profile of the borrower.
The borrower must keep a track of the market regarding loans and interest rates to avail and make the best utilization of the loan. If there are multiple loans taken from banks, then the loan payment with a higher interest rate must be paid first. Prioritization of loan repayment is a must. If there is any bonus received or profit made in an investment, then the amount should be used in repaying the loan rather than in spending such funds on less critical matters.
(Anuj Puri is chairman, ANAROCK Property Consultants)