Loan defaults: Banks can take your cash from account
Did you know that banks can hold your money hostage? Well, they can, and the ransom you have to pay to get your money back: clear all outstanding dues. Banks have devised a clever way of ensuring that customers clear credit card dues and repay loans on time. If you default for several months, the bank can deduct money from your savings accounts or refuse to pay money from the fixed deposit when it matures.
No, banks aren't trying to con you. What they are doing is perfectly legal. In fact, they have your permission to do so. You don't remember giving it, do you? But you did when you signed on the dotted line while availing of the loan or the credit card and accepted the terms and conditions (T&C).
The fine print will have a statement similar to this: "I hereby grant and confirm the existence of the right of lien and set-off with the Bank, which it may use anytime to utilise any money belonging to me and deposited with the bank, towards any outstanding dues".
All this legalese simply means that the bank has the right to deduct money from your account. "Any collateral that the bank can legitimately hold can be held back. Even FDs can be used," says Harsh Roongta, CEO, Apnapaisa.com. Of course, if your T&C does not state this, the bank cannot touch your money.
Says Kishori Udeshi, chairman of the Banking Codes and Standards Board of India that lays down the code of conduct for bankers: "Banks can't debit unless you agreed that such measure can be taken while taking a loan. However, if you have signed on the loan contract and it mentions that the assets can be adjusted, then they can."
So, if you aren't careful about clearing all your dues with the bank, you might find yourself bankrupt, literally, as Ashish Jha (name changed) discovered last year. For the Mumbai-based script writer, 2010 began with a financial blow. He had outstanding dues of Rs 90,000 on his credit card and had lost his job.
In April, he asked a friend to lend him some money, who transferred it to Jha's account. When Jha went to withdraw the money, he found that the bank had deducted the whole amount as payment towards the credit card dues. A few months later, Jha deposited a cheque of Rs 35,000 in the bank that he received as payment for writing assignments. This too was appropriated by the bank.
If you think you can avoid such a situation by opening a second account, you still won't be able to get away. You can't default on one account and get away by keeping to the straight and narrow on the other. Take the case of Sumit Shah (name changed), who had taken a loan against gold from Canara Bank.
Even when he repaid the entire loan, he could not get the jewellery back as he was defaulting on a different loan that he had taken from another branch of the bank. Similarly, Charan Singh Guha too had to lose out on his savings. When Punjab National Bank withdrew money from his account, the banking ombudsman upheld the bank's right to do so as Guha was the guarantor of a loan that had not been repaid by the borrower.
A bank is eligible to demand additional security when property prices fall. Even if you are loyal on your EMI payments, this clause demands a security cover in addition to your loan amount and if a borrower fails to provide such a security then he/ she may be declared a defaulter by the lender.
Sameer Tiwari, a Pune based mechanical engineer, thought he had made a “prudent decision” by opting for a fixed rate EMI when he took his home loan five years ago from a reputed national bank.
Three years after the date of disbursement, Sameer received a letter, which said it was time for renewal of his loan and that the interest on his fixed home loan had been increased by 0.5 per cent. Though this did not mean a change in the actual EMI he paid, this would however reflect first on his loan tenure, which would be increased to accommodate the interest change. On checking with the bank, he learned that there was a clause in the agreement that said the fixed rate was only for a period of three years and not for the entire loan tenure!
This letter brought endless, sleepless nights to Sameer and his family now, they had to recalculate and replan all their income sources and planned expenses because the “fixed EMIs (Equated Monthly Instalments)” will increase!
What is a loan agreement?
A loan agreement is a ‘contract’ entered into between the borrower and the lender (banks and financial institutions) that regulates the terms of a loan. The loan agreement comes into picture immediately after the bank appraises your credit and the property that you have identified.
The agreement and the fine prints…
In the euphoria to acquire that dream house, various clauses in the loan agreement are often overlooked. However, these clauses have a significant bearing on areas ranging from interest rates to repayment schedules. Reading home loan agreements is generally viewed as a sheer formality and one always tends to ignore points that the agreement mentions. Moreover, the legal language used in the document often seems more alien than human!
In any case, not reading a loan agreement thoroughly can land you in a soup. Here are some clauses, which should be searched for inside a loan agreement and be clarified with your HFC (Housing Finance Company):
Reset Clause on Fixed Rates: Banks have introduced the reset clause in their fixed rate, home loan agreements so that they can increase interest rates in case the market rates increase in future. This effectively makes fixed rate loans equivalent to floating rate ones. This gives the banks an escape from interest rate surges but is a disadvantage for the borrower who is mostly unaware about such content in their agreement. Typically, the period for such reset clause varies from two to five years depending on the bank or housing finance company you borrow from. So read this clause in your loan agreement carefully.
Force Majeure Clause: There may be certain loopholes in your home loan agreement that allows the bank or home loan company to unfix and raise the fixed interest rate under exceptional circumstances. This will be mentioned under the ‘force majeure’ clause of your agreement. However, the differentiation between ‘exceptional circumstances’ and normal circumstances is always a tough task.
For e.g. A cut in banks’ prime lending rate is not automatically translating into reduction of all PLR-linked loan rates. The reason being cited is that the bank’s margins are under severe stress due to lending rate cuts. They feel interest rates on some existing sub-PLR loans do not even cover their cost of funds and any further fall in those sub-PLR loans will worsen the matter. Therefore, some public sector banks have revised the existing loan contracts in case of select sub-PLR borrowers, by using the ‘force majeure’ clause, meaning a ‘situation beyond control’.
Defining a Fault: A ‘fault’ for a layman often means a non-payment of an EMI during the loan tenure. However, your bank or HFC may have a different meaning for this term. The home loan agreement of few banks defines fault as a case when the borrower expires, the borrower is divorced (in case of more than a single borrower), or the borrower is/are involved in any civil litigation or criminal offence. Therefore, you must be clear what your lender means by the term ‘fault’.
Security cover at times of falling property rates: This clause states that a bank is eligible to demand additional security when property prices fall. Even if you are loyal on your EMI payments, this clause demands a security cover in addition to your loan amount and if a borrower fails to provide such a security then he/ she may be declared a defaulter by the lender.
Floating is Fixed and vice versa: Floating rate as well as fixed rate home loans are linked to the Benchmark Prime Lending Rate of a bank or the HFC from which you take a home loan. Hence, if the BPLR is 13.5 per cent and floating rate home loans are at a discount of 1.5 per cent to the BPLR, then the interest rate on a floating rate home loan is 12 per cent. So whenever the BPLR is raised, then the interest to be paid on the floating rate home loan goes up. The vice versa also holds true.
However, banks and HFCs do not show the same alacrity to reduce the interest rates, which they might have shown when increasing it. When interest rates come down, banks and HFCs offer lower rates to new customers but existing customers continue paying the higher interest rates. Check with the bank or HFC regarding the details about such clauses.
These clauses are overlooked by most home loan borrowers and some of them eventually end up paying interest rates, fees, or hidden charges completely out of the blue. It is imperative that you have a thorough understanding of such clauses with your bank or HFC.