Last two years of the ongoing pandemic proved a double edged sword. On one hand, the deadly virus triggered a never-seen-before health emergency, which saw millions of lives consumed. On the other, it brought acute economic woes that left millions jobless and millions of households witnessing drastic cuts in their income. The virus not only proved a termite on peoples’ savings, but it also pushed them into debt trap.
Overall, the economic crisis hit households badly and left them struggling to keep their domestic budgets afloat. However, the government made timely interventions through various stimulus packages where banks were positioned to extend financial assistance on liberal terms and conditions to keep the businesses and the households afloat on the financial front.
Today, the purpose of revisiting the virus-induced miseries is that the COVID-19 pandemic has disrupted people’s finances on a large-scale. Innumerable families have found themselves in a dilemma when their deceased family members have bank loans outstanding against them. Besides, there are very important queries from some acquaintances on similar lines where they want to know their obligation of repaying a loan of their deceased family member.
I have already deliberated upon the issues regarding deceased borrowers and obligations of their family members to repay the outstanding loans in some of my previous columns. But, a few unique queries from some acquaintances makes a sense to revisit the issue and apprise the legal heirs of a deceased borrower about the responsibility in repaying the outstanding loans.
One of the queries is from a terminally ill borrower who has exhausted all his savings in the treatment of his incurable disease. It was one of his friends who had been depositing his loan installment for the past one year or so. Now he does not want him to share his financial burden, and looks at the bank to come to his rescue by waiving off his debt.
There are many such cases where borrowers are terminally ill, left in financial disaster and are unable to pay their loan installments. It’s also a fact that the lenders (banks) are least bothered to come to their rescue. Basically, all such borrowers falling in this category of distress situation may not look for complete waiver of the loan. There would be some who may look for rescheduling of the loan, waiver of the interest burden of the loan or a special package to help them to get out of the debt trap.
Meanwhile, the action of banks to recover outstanding loan from the family members of a deceased borrower depends on collateral and if there’s a guarantor, a co-borrower in the loan. The steps that banks will take for the recovery of dues also vary based on the category of the loan. For instance, in case of a home loan, banks have regulations in place to remove their money. In others, like a personal loan, there is no legal recourse for a bank.
Are banks in a position to mitigate the sufferings of such terminally ill borrowers?
If you go by the rule books, the banks can lay hand on the security of the borrower to realize their dues. Here the guarantors are legally bound to repay the loan along with interest if the borrowers fails to repay it.
However, keeping the rules apart, the banks can go to any extent to help such borrowers without laying hands on their assets kept as collateral security. They can categorize such distressed borrowers and those found extremely exhausted, both financially and health wise, can be given special relief by waiving off their outstanding loan amount. Here the banks can take route of corporate social responsibility (CSR) funds to square the outstanding loan amount of such borrowers.
Of course, under companies ACT 2013, CSR rules don’t provide for such relief as such activities should not be linked to the core business of the bank. But there is always a way out. The main thing is that the bank should have an interest to help these borrowers. The banking community stands assembled under the banner of union territory level bankers’ committee (UTLBC). Let all banks/FIs at UTLBC level pool a portion of their CSR funds and draft a proper scheme for providing relief to such borrowers. There should even be no hitch to seek amendment to CSR Act 2013 on these lines, if required.
Is a co-borrower in a home loan liable to repay the loan in case one of the co-borrowers dies?
Yes, if one of the co-borrowers dies, the responsibility to repay the loan is on the co-borrower who is alive. He/she will need to continue repaying the loan. The bank will remove the deceased from the loan. If the repayment was linked to the bank account of the deceased, the bank will change it and link it to the account of the co-borrower who is alive.
Who has to repay the loan if there is no co-borrower?
The family of the deceased borrower is liable to repay the outstanding loan. Even a guarantor has the responsibility to repay the loan. However, there are options to repay it. In case, any legal heir of the deceased borrower willing to pay the loan in equated monthly installments (EMI), the bank will add him/her as a co-applicant after checking his/her creditworthiness.
If the financial position of the family (legal heirs) is not good enough to meet the obligation of repaying the outstanding loan of the deceased borrower, the bank can take possession of the house under the Sarfaesi Act. The house, under this Act, can be auctioned by the bank to recover its dues.
Here it’s worth mentioning that banks won’t allow another person to pay the EMI on behalf of the deceased borrower as it violates KYC and money laundering regulations.
Are legal heirs liable to repay personal loans of their deceased borrower?
There is no legal provision for banks to recover outstanding loan amounts in the personal loan segment from the family members of a deceased borrower. Personal loans fall in the unsecured category of loans. Even credit card dues cannot be recovered from the legal heirs. Notably, in personal loans there is no asset to recover in case of default. This is why the banks charge higher interest rates on such loans.
However, absence of any legal provision to recover dues from the deceased borrower’s family members should not be used as a loophole to avoid paying dues to the bank. The deceased borrower’s family should make every possible effort to repay the personal loan out of love and affection for the deceased family member. Here the bank can work out some concessions in terms of interest waiver etc. and can even take a haircut if the financial position of the family demands so.
What is the way out for borrowers to keep their families out of the burden in their absence?
Since loans have become an integral part of household budgets, it’s imperative for borrowers to take route of insurance policies covering the loan amount. For instance a borrower can get his loan insured under a loan protection plan. They can take a reduced balance plan. In this plan, when there is a claim because of the demise of the borrower, the insurance company settles the outstanding dues of the bank. There is another option where the insurance cover remains the same throughout the loan tenure. Known as a level cover plan, the insurance cover is provided to the whole loan amount. In case of a claim, the insurance company pays the outstanding dues to the bank and the rest of the amount is paid to the legal heirs of the deceased.