Avoid loan defaults to save your credit record

The perception regarding taking loans has gone a sea change these days. The market has opened up significantly in the past two decades. Home loans have been around for long. It is a secure and attracts the lowest interest. Vehicle loan, too, is a secure loan and is available at comparatively low rates. Many times, car manufacturers themselves subsidise the loan to sweeten the deal. Delinquency in the home segment is lower than the vehicle segment due to the Indian consumers’ penchant for treating the home as a sacred investment.

But, personal and credit card loans are different. They are both unsecured loans. What’s more, these days personal loans are available without collateral or guarantors and require minimum documentation. With rising consumerism and aspirations, personal loans and credit card spends are increasingly the poison of choice. Add to that, cut-throat competition, which pushes the lenders to dive deep into the city’s unseen folds to source customers. The cream has long gone. Apparently, people earning as low as `3,000 per month, can now get a personal loan. By its very nature, people who have to take recourse to personal loans may not be financially very sound. Moreover, there are no guarantors

or collateral, and loans are being offered increasingly to segments even below the lower middle class. Also, recovery agents have now been restrained and banks have to go through the legal redressal mechanisms, which is notoriously slow. The upshot — rising defaults.

Credit card debt is similar. It is very easy to get carried away by the plastic sliver in one’s hands. Since, one does not count out the money and just needs to swipe, one does not realise the outgo. When it comes to payment, many times, there isn’t enough money to settle the outstanding in one shot. Hence, people go on revolving credit. That works for some time, till more goods have been bought and the revolving credit payable every month grows into a huge figure. Then defaults happen. Credit cards are also easy to come by. Customers are serenaded with offers of lifetime free credit cards and sugary sweet offers. Even here, the penetration has gone all the way down to those who may not be eligible for a credit card in the first place.

By stretching themselves and defaulting on loans, customers are doing untold damage to their credit-worthiness as everything is being captured today and is being reported in one’s credit history. Defaults damage one’s credibility, making it difficult or more expensive to get loans in future. This could bar defaulters from any access to capital, should they require it, anytime in future.

The previous generation can teach us a thing or two here. Living within one’s means is something that today’s senior citizens vouch by. No holidays on EMIs or fancy white goods on easy loans for them. While enjoying the good things in life, we all need to watch out and make sure we don’t cross the line. Once we are on the other side, we are damaged goods... forever condemned by these institutions which will not extend their line of credit. If that sounds like Armageddon, it is!

16 Sep, 2010, 02.01AM IST,ET Bureau

Query corner: Loans

VN Kulkarni, Chief counsellor, Abhay Credit Counselling Centre, Our expert guides you in matters relating to banking & finance.

It is mandatory for Banks to provide monthly account statements

NEW PERSONAL IDENTIFICATION NUMBER

I have one savings bank account in Axis Bank , Sodepur, with facilities. Since I forgot the PIN when the ATM card was issued to me, I applied afresh by paying the bank a cheque of `56 for a fresh PIN. The customer service office in Bombay informed me over the phone on April 6 that a fresh PIN has been issued on March 26, 2010 and wanted confirmation of the same. Since I did not receive the same, she advised me to immediately contact the bank. I got to know that the Calcutta branch had couriered the letter to a wrong address, even though my address was correctly given in the account opening form accompanied by photocopies of Passport and PAN card which I had also given the bank when I had applied for the new PIN.

Despite repeated requests, the bank has failed to issue a new PIN and wants me to apply afresh. I have also communicated the issue to the customer service executives. Every time, they ask me about my authentication, take note of the issue, put me on hold and tell me to contact after 48 hours [three times in the past three weeks]. When I called back, they told me the issue is still in the ‘Open State’ and that it will be taken care of. You can verify with Case#10042050 & 10055048. In the meantime, my address has been corrected, but there is no remedy for my problem. Incidentally, till date I have not received any quarterly statement of accounts since the date of my opening the account on September 2009. —Jyoti Chakraborty

For not conveying the PIN of your ATM card please take up the matter with bank’s nodal officer so that matter can be resolved early. While taking up the matter please draw the attention of the nodal officer that the bank has committed to provide the statement of account every month according to the code of banks’ commitment The relevant portion reads as follows: “Para 8.1.1: To help you manage your account or check entries in it, we will provide you with a monthly statement of account unless you have opted for a passbook. We will also send you statement of account by email or through our secure internet banking service, if you so desire provided we have such a facility with us.”

The bank is supposed to send a reply within 30 days and if not it has to convey the reasons as to why it needs more time. In any case this period has already elapsed in your case . If you do not get a satisfactory reply within a reasonable period you can file a complaint with Banking Ombudsman.

HOW TO GET A 16-DIGIT BANK A/c No. FOR ECS

I am a senior citizen with a monthly income scheme account with the post office. The interest was regularly credited through the electronic clearing service (ECS). But when I opened a new account in January 2010, the post office insisted that I should have an account with a bank that has a 16-digit code as per the circular of AV Deshmukh, assistant director of postal services — Mumbai region.

This applies only to new accounts opened after January 2010. Even my State Bank of India (SBI) account has an 11-digit number. My appeals to the post office and SBI have been in vain. Further, Times of India, in its June 24 edition, carried an advertisement on page 11 from Indian Overseas Bank , stating that all their customers should have bank accounts with a 15-digit number to make or receive payments through ECS. Kindly clarify on the above. —S Krishnamurthy

In order to get your monthly interest through ECS, the post office needs certain details of your account as per the guidelines issued by the of India (RBI). The details which are required are as under:
Name of the beneficiary bank.

Name of the beneficiary
Account number of the beneficiary
The IFSC code of the beneficiary branch.

This code is available on the cheque book given by your banker. This should suffice for them to remit the money . Kindly clarify the matter with the post office once again.

BANK’s REFUSAL TO HONOUR DEMAND DRAFT

I received two demand drafts (DDs) from my stock broker by courier many years after I sold some shares. I deposited the DDs in my bank and the bank returned them with a ‘stop payment’ mark. When I asked the bank I was told that the broker had made a false complaint with the police that I had stolen those DDs. I had complained to the RBI and pointed out that the account payee was in my name.

After six months, the bank issued me a new DD. But again when I deposited it, the broker again got a stop payment from a civil court. After six months, the court ruled in my favour, but when I approached the bank for revalidation, it refused to do it. Now, the broker is again playing games and approaching the consumer court saying the bank has issued the DD in my name by mistake. How can I get back my money?
— Sudha Hasmukhray Kamdar

Ordinarily, a bank issuing a draft cannot refuse to pay the amount, unless there is some doubt about the identity of the person. Also, once the draft has been delivered to the payee or his agent, the purchaser is not entitled to ask the issuing bank to stop payment of the draft to the payee on other grounds, and the issuing bank can pay back the amount to the purchaser of the draft only with the consent of the payee. It is crystal clear that payment of a draft can be withheld only if the identity of the person presenting it is doubtful or if the title of the person presenting the draft is disputed.

There is a decided court case of Bhadoria vs. State of Indore and others (AIR 1992 MP 148) wherein neither the identity of the person presenting the draft is doubted nor the title of the person presenting the draft is disputed. The court in this case had ruled that the bank was not entitled to withhold the payment of a DD. In view of this ruling, you may take up the matter with the bank if need be with the help of your lawyer.

My friend who lives in the same society as myself has switched his home loan from the existing bank to LIC. He along with an agent approached me to be the guarantor for the loan for the period till the property documents get transferred from existing lender to LIC Housing. The agent assured me that I would get the guarantee back within a month. It's been almost seven months now and I am yet to get back the guarantee. I took up the matter with my friend and the agent, but the issue is getting delayed for one reason or the other. Is there a way to get the guarantee back? —Rajesh

Having executed the guarantee, it is now difficult for you to get it back as the papers are with LIC Housing. Neither your friend nor the agent who lured you to sign the papers can help you at this stage. Now, the only option for you is to convince your friend for a substitution of a guarantor acceptable to and getting a letter thereafter from the said institution stating that you have been discharged of your liability as a guarantor to the loan account of your friend.

16 Sep, 2010, 02.11AM IST,ET Bureau

Banks may base education loans on placement track

NEW DELHI: Your application has a better chance of getting a favourable response from if the institute you propose to study in has a good placement record. Faced with rising bad debts in their education loan portfolios that are not backed by collateral, banks are looking at the of institutes to judge the repayment capacity of seeking loans.

"The college may enjoy the government recognition, but if placement record is poor, how do you expect a student to get a job and repay?" said an official in the country’s largest lender State Bank of India . The government rules do not allow banks to demand or security for education loans up to 4 lakh, a measure to ensure funds are easily available to needy students.

This unsecured lending, according to bankers, has seen a sharp spurt in instances of non-payment . They want to now ring fence these loans through other qualitative measures . So far banks have sanctioned 34,192 crore towards education loan.

Instead of sanctioning loans merely on the basis of the student’s educational track record and whether the course and the educational institute was approved by the government, banks are also looking at the minimum and maximum package offered to the students at the institute to assess repayment capacity, though the Indian Banking Association has not yet said anything on the issue.

"It’s up to the sanctioning officer to take additional measures if he’s not convinced with the application. However, due care is taken not to unnecessary harass the student," said an Indian Bank official. One major public sector lender is asking for life insurance cover from its student applicants . "The policy is assigned in the favour of the bank and works as a double check," said a senior official with Punjab National Bank . The insurance policy helps to keep a track of the student and if there is an unfortunate event it protects the bank’s investment.

The annual premium is paid by the student himself, or by the co-applicants , but the premium is generally very low. "In case the loan turns bad, there is some limited amount which can be recovered by surrendering that policy," explained an official with Bank of Baroda .

Banks are also looking to restructure education loans that have gone sour. Indian Bank is exploring the option of giving one-year relaxation to students for repayment towards their loans. Generally banks give a payment moratorium period of six months from the time a student completes his course. Banks have found that most loans turned bad in cases where students are unable to find jobs.

6 Sep, 2010, 11.08AM IST, Dheeraj Tiwari,ET Bureau

Borrowing is not a bad idea for overseas vacation

Going on a holiday to Europe or swiping your to buying an LCD is not a bad idea, provided you have saved for it. Taking a holiday or revolving payments on your credit card is an expensive proposition, as you can end up eroding your bank balance and potential .

So is a bad idea? The answer is ‘No’. It depends on the end use of loans.

Loans can be categorised into secured and unsecured loans. Secured loans are issued by banks to borrowers against some asset such as house, car or investments. Home loans and car loans are the best examples of secured loans. If you are cash-strapped at some point of time, you can pledge your house or investments to borrow some money.

The disadvantage is that you will lose the asset if you are unable to pay back the money. But the interest rates are much lower and repayment periods are longer under secured loans.

An unsecured loan is a contractual obligation between you and a bank. The interest rates on these loans are higher (5-20%) since these loans are not backed by any assets or investment. The repayment periods are also shorter (up to three years).

Good Loans: Housing loans are good as you are paying EMIs to create an asset. Appreciation of property will earn you better returns in future.

Bad Loans: Car loans, personal loans

Car loans are bad because the value of the car depreciates faster than the principal amount.

Worst Loans: Credit cards, travel loans, loans from private money lenders. The interest rates are almost 40-45% and the end use is consumption, which can be funded with savings.

23 Sep, 2010, 11.20AM IST,ET Bureau

Query corner: Loans

Our expert guides you in matters relating to banking & finance.

Operating bank lockers of ailing parents
My parents had a locker in Bank of India for more than 30 years. We shifted to another city around 12 years ago and my parents did not access the locker during the period because of ill health. My mother passed away recently and my father has serious health problems. Since I am their only child, can you please advise me on how to get legal permission to operate the account.
S Segal

Since we do not know whether there was a nomination for the locker, you can refer to the Reserve Bank of India (RBI) guidelines. RBI states that when both or all the joint locker hirer(s) die and where there is nomination, access to the locker may be given to the nominee(s). In such cases, a death certificate and identification proof of the nominee(s) are the only documents that are required. In case where there is no nominee/s, access to the locker may be given jointly to the legal heirs of all the deceased hirers (or the executor/administrator if appointed). In such cases, only a death certificate and proof of legal representation need to be submitted to the banker. You may approach your banker and he will certainly help you to resolve the issue.

No interest on closure of HUF PPF account
The State Bank of India’s (SBI) Parliament Street branch in New Delhi has refused to pay interest on a public provident fund (PPF) account opened on behalf of a Hindu undivided family (HUF) after a recent government circular quoted RBI’s directive that PPF HUF accounts cannot be further extended from May 13, 2005. I have a PPF account which was extended in 2004 up to March 31, 2009. SBI has credited interest on March 31, 2010 for the FY10. It has informed me that it will deduct the interest amount after the maturity period while making the payment on closing the account. Can SBI refuse to pay any interest after expiry of the maturity period even though a huge amount is lying in my PPF HUF account?
Harish Chander Sahni

While you are aware about the notification dated May 13, 2005, it is also necessary to know what has transpired thereafter. In terms of Notification RBI/2004-05/480Ref.No.CO.DT.15.02.001/H-9844-9866/2004-05 dated 25-05-2005, it was clarified that existing accounts opened in accordance with the rules in operation prior to the amendments dated May 13, 2005 shall continue till maturity and deposits/withdrawals in/from these accounts shall be allowed to be made in accordance with the said rules. However, any extension of existing accounts shall be subject to the amendments dated May 13, 2005. Since no further extension can be granted, it is further clarified that accounts should be closed and the deposits refunded without any interest to the depositors. In view of this, the stand taken by SBI is correct.

Credit card fraud by bank’s reresentative
I had applied for a credit card of an MNC bank at a fair organised by my company. To my shock, the bank executive, who collected the form, fabricated all the important details and used the card to spend over `5 lakh. The card is in my name, but all the details like address and cell number were fabricated. I came to know of the fraud when the bank contacted me for the payment dues. I lodged a complaint with the bank. More than 10 days have passed, but the bank has only contacted me once for casual enquiry. I’m worried. What should I do?
Michael

This is a fraud committed by the representative of the credit card issuer. You should immediately lodge an FIR, giving the details so that the investigation will throw light and find out if others have suffered in a similar fashion. Write to the bank’s nodal officer enclosing a copy of the FIR and specifically, stating that you have neither received nor acknowledged receipt of card. The credit card issuer may have indicated the utilisation of card at certain shops/cash withdrawals at ATMs etc. After checking the details, file a dispute form. Also, ask the bank to block the card/cancel it forthwith. You may have to wait for some time before the issue gets resolved. If at all it gets resolved soon, you need to check the CIBIL report to find out that your name does not appear as a defaulter. If it does, then you need to take up the matter again for a clean report.

A certain amount of money was deposited jointly for fixed deposit (FD) in UBI on May 7, 2007 with the instruction that the maturity amount will be payable on a ‘either or survivor’ basis. The FD matured on May 7, 2010 and the original fixed deposit receipt or certificate is in possession of the second depositor. On maturity, the second depositor instructed the officer-in-charge to credit the entire maturity amount to his savings account of the same branch of the bank. The officer rejected the request saying that the amount could not be credited to the second depositor’s account and that it would only go to first depositor’s savings account. Please suggest a legal or administrative remedy.
Kousik Adhikari

Unless there’s a dispute and/or there is a court order restraining the bank to pay money to the second depositor, the bank cannot withhold payment to the second depositor. A fixed deposit in the joint names of two persons is nothing but a joint account which, as the name itself suggests, is repayable on the expiration of the agreed period. An ‘either or survivor’ clause in such an account means that the amount payable by the bank on maturity of the fixed deposit may be paid to either of the account holders by the bank. Kindly bring this aspect to the notice of the bank. If the branch authorities are not acting upon the instructions of the second depositor, take up the matter with bank’s nodal officer.

30 Sep, 2010, 05.26AM IST, VN Kulkarni