Covid 2.0: Ways to get out of debt trap amid a surge in loan defaults

In April, for instance, 29 million auto-debit transactions worth Rs 22,000 crore conducted through the National Automated Clearing House (NACH) failed, primarily due to insufficient funds.
For representational purpose. (File Photo | PTI)
For representational purpose. (File Photo | PTI)

NEW DELHI:  Indians are trapped in a whirlwind of uncertainties financial and health — that has quickly thrown them off track in terms of managing finances.

In a worrying repetition of the first Covid-19 wave led economic distress, borrowers are holding on to funds even at the risk of defaulting as efforts to slow the spread of infections continue to inflict unemployment, pay cuts and higher medical expenses.

In April, for instance, 29 million auto-debit transactions worth Rs 22,000 crore conducted through the National Automated Clearing House (NACH) failed, primarily due to insufficient funds.

This reflects a bounce rate (read: unsuccessful transaction) of 34.05 per cent in April as against 32.76 per cent in March or pre-second wave. Simply put, these are recurring payments like equated-monthly-installments (EMIs), utility bill payments and insurance premiums where borrowers have agreed to auto-debit mandates and funds are drawn monthly from their bank account.

In value terms, as much as 27.9 per cent of such transactions were unsuccessful in April against 27.5 per cent last month with most banks warning that it could worsen in May as more states imposed lockdowns.

Recently, HDFC Bank CEO Sashidhar Jagdishan said that retail loans may see higher delinquencies in the near term and borrowers who had to avail cover under regulatory dispensations like moratorium and restructuring after the first wave are more likely to default.

For borrowers, losing income has meant making tough choices, such as skipping a loan payment, but here’s what you need to know:

Non-payment of previous loans can affect your CIBIL score and lenders will be reluctant to give you a loan in future. In case of multiple loans, a lender can also impose penalty on the defaults and late payments.

This usually applies to an unsecured loan where the bank doesn’t have any collateral as a guarantee against non-payment.

Multiple defaults or zero repayments of interest or principal within 90 days past due, could lead you into a debt-trap.

And getting out of a debt-trap is not at all an easy task. Let’s look at the options one can consider to avoid a debt trap:

Will banks let you skip a loan payment?

If you find yourself unable to pay the upcoming EMI on time, you need to be proactive and communicate your situation to the lender.

Your bank likely offers deferment and forbearance plans, but you will first have to take the initiative and ask for help. You can then avail one of these options:

Reduce EMI: If you are struggling with the EMI amount, consider having the monthly outgo reduced. You can approach the lending institution and request them to increase your loan tenure.

This, experts say, would reduce your monthly EMI amount though you may end up paying a higher amount in interest. Once your financial situation is sturdier, you should increase the EMI amount again.

Benefit from restructuring: If a borrower is unable to maintain the terms and conditions of his loan, he can request the lender to relax the same.

This may lead to a reduction of charges, lowering of interest rate, lengthening of the loan tenure, a moratorium on interest, among other relief measures.

The Reserve Bank of India has recently allowed eligible borrowers, who did not use the first loan moratorium offered last year, to avail of the second one and those who did avail of the first one can get the moratorium period extended.

Restructuring applies to all kinds of loans, which means that you will not be labelled as a defaulter if you repay the installments post this period.

Liquidate the investments: Experts say to unburden from an outstanding loan, borrowers can opt for liquidating the underperforming or non-performing investments to substantially save interest mounting up on such loans.

Retail loan to see higher defaults 

Banks expect retail loans to see higher deliquencies in the near term. According to analysts of Emkat Global Financial servives, severely affected states account for about 48 per cent of retail credit.

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