Rejig debt to avoid defaults

Banks give interest holiday, tenure extension or moratorium if they feel the borrower is genuine

Banks say instances of defaults on second-property loans are rising. However, there is a way out for borrowers.

Ashok Jain, deputy general manager (credit monitoring and restructuring) at Union Bank of India, says usually, banks restructure loans if there is concrete proof the borrower is faced with woes. If there is a job loss or pay cut, a borrower will have to produce a company statement showing that. Also, such borrowers could also produce proof of having applied to another company to establish their repayment capacity. “In such cases, banks usually lower monthly instalments and increase loan tenures,” he adds. Loan tenures can be extended only to 30 years.

Banks could also allow you a moratorium of, say, two-three months or an interest holiday. Ranjit Punja, founder of credit advisory firm Credit Mantri, says it’s easier for individuals to negotiate if they have repaid a good chunk of the loan — say, through three-four years. You may not be allowed to restructure the loan if only six months of the loan tenure have passed.

He cautions some banks may not have the facility to makes changes to your equated monthly instalment (EMI) clause on their system. “The bank would say you would be shown a defaulter in their system for three months. Once you start repaying and clear the backlog, the credit profile will improve,” he says, adding customers heading for a default might not have a choice.

Debt experts recommend converting loans to overdraft (OD), though this can only be used by borrowers who have a bonus component in their salary. Say, you have a Rs 50-lakh loan, of which Rs 20-lakh principal has been paid. In such a case, you could convert the remaining Rs 30 lakh into an OD. Assume you get a year-end bonus of Rs 5 lakh. If this is deposited into the OD account, the due amount would fall to Rs 25 lakh. When in need of cash, withdraw the Rs 5 lakh. This saves you the EMI burden, though withdrawal from OD accounts comes at about 15 per cent.

Sukanya Kumar of loan advisory firm RetailLending.com says, “Those buying an under-construction property can pay pre-EMI — service only the interest part till possession. This is a tad expensive, but is easier on the pocket.”

Borrowers could also take a top-up on a home loan. “If borrowers are ready to switch loans, banks such as HSBC, ICICI Bank and Standard Chartered give you up to 100 per cent of your original loan amount as top-up at home loan rates,” Kumar says. Banks do not allow switching in case one loses a job. But if those taking a pay cut can convince the bank about their repayment capacity, they may be allowed to switch.

Those servicing two loans can use the top-up to pre-close one. The last option could be taking a gold or personal loan to lower your dues (at 15 per cent or more). Even if you have two loans from one or different banks, you can opt for restructuring.