Taking a home loan is a serious financial commitment, and not paying back could entail dire consequences. If you are defaulting on your Equated Monthly Instalments (EMIs), the bank may declare you a loan-defaulter. However, when will the bank then proceed to take possession of your home? Let’s decipher the various rules and procedures so that you stay aware and keep away from such situations.
Understanding Loan Default and NPA
When you take a home loan, a contract is made whereby you agree to repay the sum with interest in monthly instalments. If you go on to miss three consecutive EMIs, the bank labels your account as a Non-Performing Asset (NPA). That is a warning sign, henceforth starting various recovery actions from the bank’s side, which aim to bring the loan amount back.
With the present Indian realty boom, property prices have reached a level where the common man can’t afford them. Fortunately, banks and financial institutions have laid a red carpet for home loans, ensuring that even a middle-class person gets his dream of owning a house fulfilled. With this privilege comes great responsibility. Missing out on EMIs can have grave repercussions, including taking away the property itself.
What Happens When You Miss EMIs?
The Reserve Bank of India (RBI) has clear instructions to banks regarding home loan defaults. Here is what usually happens at such times:
- One missed EMI: Banks tend not to act immediately. They assume that it is merely some time-related concern such as delayed salary or some other pressing expense.
- Two EMIs in a row: Once the second EMI is missed, the bank sends you a reminder notice asking you to clear your dues.
- Three missed EMIs: Now the bank sends a legal notice on the third default, indicating that it is now a very serious matter, and the notice puts you down as a defaulter.
The moment the account is termed an NPA, the bank can recover its amounts by way of auctioning the property. This, however, is a last resort, while the bank would give ample time for the dues to be settled.
RBI Rules on Property Auction
A home loan by definition is a secured loan, in that the bank comes into possession of the collateral of the property you are buying. Failure to repay the loan permits the bank to auction the property to recover the outstanding amount. However, the bank does not rush into that.
The procedure, as laid down by the RBI, defines the right course of action to be taken:
- The borrower gets time to repay.
- The bank can auction the property, but only after sending several notices while giving the borrower sufficient opportunity to resolve the issue.
- Whenever a notice of such an auction is being sent, the borrower shall have one month to pay back the dues and thus stop the auction process from commencing.
Consequences of Defaulting on EMIs
Not being able to repay a home loan brings forth several ramifications that last for a long time.
- CIBIL Score Damage: Your credit score gets a black mark, setting up obstacles in front of securing loans in the future.
- Loan Rejection: Banks would in turn reject your loan application based on this negative repayment history.
What To Do When You Can’t Pay Your Equated Monthly Instalments?
If you have been having financial trouble and can’t pay your EMIs, calm down; there are solutions available.
- Loan Restructuring: Get in touch with the bank and speak to them about restructuring your loan. It could mean extending the loan tenure or reducing the EMI.
- Lump Sum Payment: If your finances allow, make a partial or full lump sum payment toward the loan to reduce outstanding principal.
- Tell the Bank: Be upfront about your financial condition. Genuine borrowers often get temporary assistance from banks.