Is your child going to inherit your home loan?

The debt trap is much worse than what customers earlier thought. What has added to the burden is the prepayment fee of up to 2 per cent (of the outstandings) being charged by banks.

Banks and housing finance companies are acutely aware of the problem and many have started calling individual borrowers,who find themselves in a tricky situation today. “Realising the gravity of the situation,many banks like SBI and ICICI Bank are allowing customers to extend the tenure to 30 years. Other nationalised banks may follow suit soon,” said an official of a nationalised bank.

For instance,a 35-year old may have taken a Rs 75 lakh loan two years back on a floating rate of some 9 per cent with a tenure of 20 years. His equated monthly installment will be Rs 67,480. At 55,well before his retirement,he would be debt-free. However,this calculation has now gone haywire.

For,inflation and sustained monetary tightening were something that the customer did not quite budget for. So,given the same loan amount,if interest rates have risen to 12.25 per cent,the same borrower’s EMI has risen sharply by over Rs 15,000 — to nearly Rs 83,893. A commitment he finds difficult to meet.

So,he seeks to lower his burden. The tenure increases to 30 years,beyond the retirement age of the individual. Instead of ending at 55,the loan will continue till he reaches the age of 65. An inter-generational loan,going beyond the productive life of an individual.

But beyond a particular tenure,the risk,however,is of a loan turning into a perpetual liabilitiy. Here,you keep paying the EMI,but given the long tenure and high interest rate,the individual ends up paying only the interest component of the loan. The principal remains unpaid forever,turning it into a loan in perpetuity. This is a theoretical possibility,but not something the lender or the borrower would ever let happen. So,many banks have been calling up borrowers carrying such risks to ensure they prepay some part of their loan through intermittent savings.

According to an HDFC official,the housing finance company has a dedicated cell that counsels home loan borrowers who find themselves in a tricky situation. The bank calls such borrowers to understand their comfort level in prepaying a part of the principal. But a borrower is not always able to make bulk payments. So,he bargains for a longer tenure.

While the State Bank of India and a couple of others have allowed borrowers to raise their tenure of repayment to 30 years,not all have yet done that.

Bankers say this is a classical problem that borrowers face in a rising interest rate regime. The scenario can change once interest rates start falling. “Interest rates can decline like the way it has gone up,” said Indian Overseas Bank chairman and MD M Narendra.

But the litany of woes of home loan customers doesn’t end here. If a customer gets some money for prepayment,banks charge a hefty fee of up to 2 per cent. Home loan customers are now looking to the RBI for succour.

“Chakrabarty saab (RBI deputy governor Dr KC Chakrabarty) will have a meeting with IBA and with some bank chairmen and then that implementation will be rolled out hopefully in the next one month. There will be some movement on this,” RBI governor D Subbarao promised while unveiling the monetary policy last week.

The RBI has now decided to set up a Working Group to look into principles governing proper,transparent and non-discriminatory pricing of credit. Analysts and bankers are hopeful that this panel will come out with some useful suggestions to mitigate the worries of borrowers.