Your rights as personal loan borrower

Are legal heirs liable to repay the personal loan of a deceased borrower?
Your rights as personal loan borrower [Creative Commons]

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(The views are of the author & not the institution he works for)

There is an important query raised by one of the readers. Actually he called from a bank branch where he maintains his account. He had applied for a personal loan and the bank gladly sanctioned the loan in his favor. But at the time of disbursement, he was asked to fill and sign an insurance form. On enquiring, he was told by the bank official that the disbursement of the loan is subject to the insurance policy which he has to purchase. He was even told by the official that his loan was falling in the unsecured category and insurance of the loan is mandatory for this kind of loan category.

He was clueless about the reasons given by the bank official, but was desperate to get his loan disbursed immediately. Now he wanted me to confirm that insurance cover for a personal consumption loan is mandatory. Because, the insurance premium was to be deducted from his loan amount and it was painful for him to pay the hefty premium as he was in dire need of funds at the domestic front. Basically, these kinds of queries are very common. Bundling of an insurance policy with a loan product by banks has become a norm, which otherwise is not. There are also instances where small and marginal farmers were forced by the banks to buy a life insurance policy; despite the fact they were financially not sound to bear the premium. For example, a had sanctioned a loan of Rs.50,000 in favour of a farmer for purchase of cows. Before the amount was to be released he was asked by his banker to purchase an insurance policy. Since the farmer was not able to bear the premium, the bank raised a personal loan against him to pay the insurance premium.

Though insurance cover is mandatory in business loans, home loans, vehicle loans and mortgage loans to secure the assets created out of the bank loan, the personal loans, popularly known as cash loans where the borrower is not required to give reason for obtaining a loan, don’t fall under the mandate of an insurance cover. However, in such a personal loan segment, the banks have been mostly selling loan protection insurance policies to the borrowers by pitching it as a mandatory requirement to obtain the loan.

Even as the borrowers try to show resistance to accept the insurance policy, most of them feel helpless due to the pressure of the bank officials and end up with a loan protection insurance policy bundled by the bank with their personal loan. In fact, the insurance premium is deducted from their loan amount. The borrowers don’t resist for the fear of rejection of their loan application as their approach to the bank for a personal loan facility is always urgency-driven. This practice of forcing their borrowers to purchase an insurance policy is simply against the banking norms and amounts to their exploitation. Precisely, it is an unethical practice on part of the bank.

The insurance, no doubt, provides safety and security against the loss on a particular event and affords peace of mind, protects property, eliminates dependency and encourages savings through Life policies, but it all comes at a cost where the person has to pay premium at a specified time.

Why do banks force borrowers in the personal consumption loan segment to purchase an insurance policy before disbursing the loan?

After banks were allowed to venture into insurance business, cross selling of other financial products, including insurance policies became a norm at bank branches. The banks try to push an insurance policy along with their products, more particularly loan schemes. The disbursement of the loan has been made hostage to insurance products, where some banks have been forcing customers to buy specific insurance policies. Some banks even have made it “mandatory” for the borrowers to buy a life insurance cover before loan is sanctioned and disbursed. What we find are instances of arm twisting borrowers to take specific insurance policies. Some of these are more expensive and serve little purpose.

However, in the personal loan segment, the banks hand over loan protection policy to the borrowers to secure their loan as these loans fall under the unsecured category in the books of the bank.

Is this type of cross selling by banks legal?

The Reserve Bank of India (RBI) “best practice” guidelines don’t contain any mandatory directive to offer insurance with loans. In fact, banks have been advised by the regulator not to force their customers to purchase an insurance product. Even the directives are clear that the banks cannot adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the bank. Customers should be allowed to exercise their own choice. There should be no ‘linkage’, direct or indirect, between the provision of banking services offered by the bank to its customers and use of insurance products.”

What exactly is a personal loan protection insurance cover?

A personal loan protection insurance cover helps to cover the inability of the borrower to repay the loan due to unfortunate circumstances such as death, unemployment, or due to medical conditions. Once a borrower gets this insurance cover, the responsibility of repaying the personal loan will not fall on the family of the borrower.

But obtaining a loan protection insurance cover is not mandatory and banks cannot force their borrowers to purchase the policy. It is always the borrower who has to decide whether he/she requires the cover or not. For example, personal loan insurance is not useful if you have a significantly higher amount of life insurance cover.

Notably, paying a premium for personal loan insurance is an extra expenditure. Therefore, it is necessary for the borrowers to assess their affordability. If a borrower is financially sound to bear the insurance premiums, he/she should not hesitate to get a loan protection insurance cover.

Are dependents or legal heirs liable to repay the personal loan of a deceased borrower?

In case of unsecured loans, a bank cannot compel legal heirs or dependents of a deceased borrower to repay the outstanding loan, such as a personal loan or credit card debt. According to a legal expert, as there is no collateral in place of the loan with an unsecured debt, no property of the deceased borrower can be seized to pay the bill. Furthermore, if a debtor dies before repaying an unsecured loan, the bank cannot recover unpaid debts from the deceased’s dependents, surviving partner or legal heir.

However, in case of secured loans, the banks already have collateral securities, therefore the legal heirs are bound to repay the outstanding loan amount of the deceased borrower. Notably, secured loans, like home loans, are usually preceded by an insurance policy and in the event of death of the borrower, the insurance policy will be of great help to liquidate the loan of the deceased.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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