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March 12, 2024
The EMI or Equated Monthly Instalment is a fixed sum repaid on a predetermined date for a loan or mortgage. The Calculation of the EMI considers the sum borrowed, the term for repayment and the interest factored.
In previous years, lenders conducted all banking transactions via cheques or drafts.
A customer had to give advance cheques for each instalment for example, for a Home loan approved for 20 years, the customer submitted 240 post-dated cheques, which was extremely tedious and time-consuming. The introduction of CTS (cheque truncation system) by the RBI (Reserve Bank of India) provided much relief and considerably reduced the number of cheques required.
These methods are now redundant with the development of NACH (National Automated Clearing House), which allows the automated transfer of funds within Banks for recurring payments and ECS (Electronic Clearing services), which authorises electronic transactions of funds.
A customer has to sign the ECS or NACH Mandate form, which specifies the applicant’s bank details and permits the Lender to debit the account the Bank subsequently presents the EMI for clearing to the customer’s Bank account on a fixed date.
The Bank presents an EMI for Repayment of a loan, mortgage or consumer product on a fixed date every month. The primary reason for which an EMI Returns unpaid is due to insufficient funds in the customer’s account. The borrower should maintain enough balance in the salary account before the EMI Due date in case the salary is not credited in time to pay for the EMI. If insufficient funds are in the Bank account, the EMI will return unpaid, and the Bank records this transaction as a bounce.
There are other causes, too, such as incorrect customer details captured in the mandate or the customer shifting the account to another Bank. In that case, the customer’s prerogative is to inform the Bank or make the required changes in advance. The EMI, if returned unpaid, is recorded as a bounce.
Your Bank statement details portray your financial health and management skills. The bounce of an EMI shows in your Bank statement for times to come, which hurts your credit prospects. No Financer will issue a credit to an individual with a cheque return or an EMI Bounce in the past three months. Further, it is a good idea not to apply for a Loan or a Credit Card with a discrepancy in the Bank statement, as a CIBIL inquiry will negate your score. As a precaution, always keep an EMI amount in your account in advance to maintain an on-time repayment record.
The return of an EMI is undesirable, but if it does happen, there are consequences the immediate effect is an ECS bounce charge, applicable as per the policy of the Bank. Listed below are the ECS return charges of Leading Banks.
Charges Per Return.
HDFC BANK ₹ 350/- to ₹750/-
ICICI BANK ₹ 350/- to ₹750/-
AXIS BANK ₹ 500/-
SBI ₹ 295/-
The charges are applicable each time the EMI returns unpaid: A Bank may try to deduct the EMI multiple times or as specified in the Loan agreement. Though there are instances when customers have had to pay inflated charges due to the Financers attempting the EMI many times, the rule states that if the EMI does not clear on the first or second attempt, the Financer will have to take permission from the customer to represent. The customer may deactivate the ECS or NACH mandate as a last resort.
In addition, the Financer levies a Penalty interest of 2 to 3 % on the overdue amount for the number of days the EMI remains unpaid.
If the Emi remains unpaid for 90 days, the Lender classifies the loan as a non-performing asset.
Hail or storm, the Financer presents the EMI through the ECS mandate on the designated date: respect the date and ensure sufficient funds are in the account for payment. Once done, the Bank cannot reverse the transaction even if there has been an oversight and the customer pays the instalment on the same day.
It’s not a good idea to take the payment of your EMI lightly, as the delayed payment will figure constantly in the CIBIL record. The answer is to make the payment immediately as the Bank reports the delayed Emi payment to the CIBIL.
The CIBIL account reflects the existing status of all credit taken and the payment tracks. A random EMI bounce can occur due to unavoidable circumstances, but a continuous delay or non-payment downgrades the CIBIL Score.
The Lender will send reminders and try to reach the customer to get the payments. If the applicant fails to pay the instalment within 90 days of the due date, the next step is to report the account as a write-off to the Credit rating agencies. With a loan written off or excess bounces of EMI showing in the CIBIL, the score will sink, making it difficult for the applicant to get additional credit when required.
The Bank will refer the case to recovery agents who will further contact the customer to recover the loan paying back the complete loan amount with interest will serve well, as a settled loan remark will permanently mar the CIBIL history of the client.
A Personal Loan and a Credit Card are unsecured credit; therefore, delays in payment of the EMI will affect the Credit score. With a mortgage or a secure loan, the Financer has a guarantee and can recover the amount if the client cannot pay. Therefore, the credit ratings show a little flexibility and a delayed EMI or two does not impact the credit score if the customer pays future EMI on time. However, excess EMI returns cannot be overridden even if the applicant is employed with a Top A or B Category Company.
Sometimes, an oversight can cost a lot for example, Rohit Kumar changed his job but should have paid more attention to transferring his EMI mandate to his changed bank account. When he remembered to transfer funds, his EMI had already bounced; this happened a few times in a row. Though he transferred funds and paid the amount due, noting the delay, the Bank sanctioned him a higher interest rate the next time he Applied for a Personal Loan.
Credit is readily available for individuals who manage their finances well, and Lenders look to fund customers with a good repayment record. Before taking credit, calculate your outgoings and take as much credit as you can afford to repay use our EMI Calculator to check your instalment amount.
Being vigilant about the EMI and consuming as much credit as one can manage is the answer to a timely repayment record.
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