Non-payment of EMI’s

A reliable housing loan borrower has been paying EMI for five years. His EMI suddenly stops for one month; then, it delays for more than 60 days. The bank is continuously following up. One day, the customer calls the bank and informs that his father has been in hospital for the past five months and that he has had to incur many expenses. He has also lost his job because he is not working. Then he states that he won’t be able to repay the loan in the next six months. He also says that his family has only one house, and he doesn’t want to sell it. The bank knows that if the loan is not paid within 90 days, it becomes an NPA (Non-Performing Asset). Therefore the SERFASI Act of the recovery process will come into force.

What will you do?

A house purchase is one of the largest purchases you will make in your lifetime. To finance it, you might need a loan. Many things could affect your financial health after you take out a home loan. These include loss of business, medical emergency (critical illness or accident in the family), and job loss. These events can deplete your savings. You have taken out a housing loan, and now it isn’t easy to repay the EMI. If you default on 2-3 EMIs, will the lender take possession of your property? The bank can attach your property if you default on at least two EMIs per month.
Home loans are not available from banks to help people buy their dream homes. Lenders don’t want to attach property. Although banks can enforce the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) to recover non-performing assets, they do not want to do this.

Considerations by the bank

A bank will usually allow a borrower the right to defer one EMI for up to 30 days. However, the bank will send a demand notice by mail or letter reminding you that your account is in default and your EMIs remain pending. The bank will send you a demand notice asking for payment as soon as possible after three defaults. Then the bank will send a legal notice to the borrower if the borrower does not respond to any emails.
The bank will wait three months before declaring an asset non-performing. The bank can then officially declare the home loan a non-performing asset and begin recovering the property under the SARFAESI  Act.

The SARFAESI  Act.

This act is a recovery process by the bank to take possession of a property for non-repayment of a loan.
The Act gives the bank 60 days notice to the borrower for repayment. Finally, five months later, the bank publishes in a local newspaper a notice stating the address of the property, the reserve price and the date of the auction.
Because the process of attaching and bidding on a house takes so much time, banks and financial institutions are more concerned with recovering the money than starting legal proceedings. They will continue the matter for at most six months before commencing legal action.

Here are some tips to take if you miss the EMIs

First, contact your bankers to tell them why you are experiencing a delay in payment and why your cheques have bounced.
Ask your lender about the available options.
Ask the bank to reschedule your loan to increase the term or decrease the EMI if an increase in interest rates causes the default.
The bank can restructure your loan payments by considering future income and offering your savings as collateral.
A chart should be created that shows all of your monthly mortgage payments. This will show the bank that you are a reliable customer and have not to default due to circumstances beyond their control.

Bank protocols

The bank will grant a leeway if you are serious about your repayments and prove that you have a good track record. Because a home loan is secured, the bank has more control over the asset. This is why the bank will first try to understand the cause of the default. If the bank is confident that the problem is real and that the borrower will pay the EMI soon, they will wait. Banks make such decisions on a case by case basis.
Lenders will take a pragmatic view of your situation and appreciate how important the house is to you. They will work closely with your family and you to determine the cause of the financial hardship. A bank can allow you to recover your property even after it is seized, but this must be done before the auction. The borrower can still come in and pay the fees to save his property, even if the auction date is announced. The borrower will be responsible for any bank charges incurred in announcing the auction.

What are the options?

You can request a bank to grant you a moratorium if you have lost your job but feel confident that you will get a new job within six months. Ask the bank to reschedule your loan so you don’t have to pay EMI for up to six months. After that, the bank might increase the EMI to cover six EMIs. If your finances are in crisis due to increased interest rates, or personal expenses, the bank may restructure the loan. You can either lower the EMI or increase the term of your loan to keep it the same despite a higher interest.

Prevention is better than cure.

You should make sure you have enough EMI money to cover any sudden need for money. Insurance companies may also offer coverage for critical illness or permanent total disability due to an accident.
Apart from avoiding the bank taking possession of your home, the main reason to pay the EMI again is to protect your credit score. Your credit score is about 30%, based on your repayment history. A significant portion of this depends on how often you pay your home loan if any. A few missed payments can have a negative impact on your credit score. Continuous defaults will make it more difficult to obtain loans and credit cards in future. This is a serious situation. You could use your retirement savings or retirement kitty to redeem your investments and pay the EMIs.
If the scenario does not get any better after six months, it may be good to sell the property. Talk to your bank to discuss this. then the proceeds from the sale to repay the loan is ideal . Ensure that you pay the EMIs even though the sale negotiations are ongoing. This will show the bank that you aren’t just taking it easy and will help ensure that your credit score does not drop.