Home loan borrowers perpetually worry about the consequences of defaulting. And whether they wish it or not, there could be situations where they are forced to do so. For instance, after the Mumbai bomb blasts on July 11 2006, a large number of affected families found themselves in deep financial trouble leading to difficulties in servicing their home loans.
Layoffs and steep interest rates are the more common situations when the borrower is unable to pay the equated monthly instalments.
In such circumstances, it is important that the borrower informs the bank as soon as possible. Otherwise, there is a threat that the bank might consider him a wilful defaulter. Once that happens, a long and winding process begins.
For starters, if there is a default for three successive months, the loan becomes a non-performing asset in the balance sheet. During this time, the bank sends letters and collection agents to the house for recovery.
But once it becomes an NPA, the bank gives an advertisement in a local paper declaring that the loan amount has to be paid back within 30-60 days (called the loan recall period). This is followed by taking over of the property under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Act, 2002. And, finally, the property is auctioned.
"The process is rather long. Even if it is done in a speedy manner, it takes a minimum of nine months to a year before the property comes up for auction," said Harsh Roongta, CEO, apnaloan.com, an internet portal for loans and insurance.
After the auction process, the bank is supposed to recover its money and pay the rest to the home buyer. But for the borrower, the loss is of a home - a big loss under any circumstances. So, what can one do when the house goes for auction? Housing experts say that the best way to solve this is before things reach such a stage.
Approach the bank immediately after something serious has happened to the family's bread earner. In this way, there is a good chance that the bank will understand the situation and offer some solution, such as reworking the loan structure, so that the EMI amount drops for the near term.
Kamlesh Rao, head (home loans), Kotak Bank, says, "If the borrower is in any kind of financial stress, he can come to us and pay a minimum agreed-upon sum. After that, we restructure the loan that suits the immediate requirement."
But before doing so, the bank looks at the borrower's CIBIL (Credit Information Bureau India Limited) record, background, payment history and documents that support his reason for delayed payment. Even if you are unable to pay up immediately, inform the bank about it.
Once the house goes for auction, the borrower does not have many options. According to a leading property lawyer, the law does not look at defaulters too kindly.
Some bank managers, however, claim that if the borrower gets a buyer who is willing to pay a higher price for the house (than the auction price), the lending bank could consider the option.
According to a senior Bank of Baroda executive, the person has the option to reschedule his home loan till the last moment or even buy it himself at the auction.
However, delaying the repayment process till the auction time can lead to serious trouble because many banks do not allow any leeway once it reaches that stage.