Home Loan Settlement RBI Guidelines are relevant for borrowers who are struggling to repay an outstanding housing loan and are considering a negotiated settlement with their lender.
Home loan settlement is different from simply closing a home loan after paying the full outstanding amount. In a compromise settlement, the lender may agree to accept a negotiated amount to fully settle its claims against the borrower, subject to its applicable policy and approval process.
The Reserve Bank of India issued the Framework for Compromise Settlements and Technical Write offs on June 8, 2023. The framework applies to the regulated entities covered by the circular, including commercial banks, cooperative banks, All India Financial Institutions and NBFCs, including Housing Finance Companies.
What does RBI say about home loan settlement?
RBI does not prescribe one fixed settlement amount or a universal percentage for every home loan.
Instead, regulated entities must have a Board approved policy for compromise settlements. That policy must establish the process and conditions under which a settlement can be considered.
The RBI framework defines a compromise settlement as a negotiated arrangement with the borrower to fully settle the claims of the regulated entity in cash. It may involve the lender giving up part of the amount due, with a corresponding waiver of its claims to that extent.
Therefore, a borrower cannot assume that RBI guarantees a particular reduction in home loan dues.
The lender makes the decision according to its approved policy and the circumstances of the account.
Does the RBI framework apply to housing finance companies?
Yes. The June 8, 2023 RBI framework specifically includes Non Banking Financial Companies, including Housing Finance Companies, among the regulated entities covered by the circular.
This is relevant for borrowers whose home loan has been provided by an HFC rather than a traditional bank.
The exact settlement procedure can still vary between lenders because each regulated entity must maintain its own Board approved policy.
What conditions can a lender consider for settlement?
The RBI framework requires the Board approved policy to set out conditions for compromise settlements.
These can include factors such as:
- Minimum ageing of the stressed account
- Deterioration in collateral value
- Permissible sacrifice for different exposure categories
- Current realisable value of security
- Method used to determine the value of the security
- Approval authority
- Other conditions specified by the lender’s policy
The framework says that the permissible sacrifice should be determined after prudently considering the current realisable value of available security or collateral.
For a home loan, the property securing the loan is therefore an important part of the lender’s assessment.
Can a borrower ask the bank for a home loan settlement?
A borrower can approach the lender and request consideration of a compromise settlement.
However, submitting a request doesn’t mean the lender has to approve it.
The lender can review the loan account, repayment history, financial circumstances, security available and its internal settlement policy before deciding.
If you are facing repayment difficulties, you can also use the Settlement on Loan contact page to discuss your situation.
How does home loan settlement work?
The process can vary by lender, but borrowers generally need to follow these steps.
1. Check the current outstanding amount
Obtain the latest home loan statement.
Check the outstanding principal, interest, overdue amounts, charges and any other dues appearing in the account.
If the account has already entered recovery proceedings, ask the lender for the current status as well.
2. Understand the property’s current status
A home loan is secured against immovable property.
Therefore, borrowers should understand whether the property is still with them, whether any recovery proceedings have started and whether any notice relating to the secured property has been issued.
3. Assess your financial position
Calculate how much you can realistically arrange.
Consider your income, expenses, other liabilities, savings and the value of the property.
A settlement proposal should be based on funds that can actually be arranged within the agreed period.
4. Submit the settlement request
Approach the bank or housing finance company through its official channel.
Provide the requested financial information and supporting documents.
The lender will then decide whether the proposal can be considered under its settlement policy.
5. Obtain written settlement terms
If the lender agrees to settlement, carefully review the written terms before making payment.
Check the settlement amount, payment deadline, loan account details and treatment of the remaining dues.
6. Complete the agreed payment
Make the payment through the lender’s official channel and keep the receipts.
After completion, request written confirmation of the final account status and any applicable property related documentation.
What if the home loan settlement payment takes more than 3 months?
This is an important point under the RBI framework.
Where the agreed settlement amount is payable over a period exceeding 3 months, the compromise settlement is treated as restructuring under the applicable prudential framework.
Therefore, borrowers should not assume that a long payment schedule will be treated in exactly the same way as a settlement payable within 3 months.
The lender will have to apply the applicable regulatory treatment.
Who approves a compromise settlement?
The RBI framework contains specific requirements regarding approval authority.
The authority approving a compromise settlement must be at least one level higher in the hierarchy than the authority that originally had the power to sanction the credit or investment exposure. An official who participated in sanctioning the original loan cannot participate in approving the compromise settlement of the same loan account.
This means a settlement should be treated as a formal approval process rather than an informal arrangement with a collection representative.
Can the lender consider the value of the house?
Yes.
The RBI framework requires regulated entities to consider the current realisable value of available security or collateral when determining the permissible sacrifice in a compromise settlement.
For a home loan, the property securing the loan can therefore be relevant to the lender’s assessment.
The lender’s internal policy will determine how the property value is assessed and how it affects the settlement proposal.
What happens to the property after home loan settlement?
The property related consequences depend on the settlement terms and the status of the loan.
If the settlement has been fully completed and the lender has agreed to release its security, the borrower should obtain the relevant documents and confirmation from the lender.
If recovery or enforcement proceedings have already started, additional legal and procedural issues may arise.
Borrowers should therefore obtain written confirmation about the status of the mortgage and the release of the lender’s security after completing the settlement.
Does home loan settlement affect CIBIL?
Yes, a settlement can affect your credit profile.
If the lender accepts less than the complete amount originally payable, the account may be reported as settled rather than closed, depending on the lender’s reporting.
This can affect how future lenders view the borrower’s credit history.
A borrower who can afford to repay the complete outstanding amount should understand the difference between full closure and settlement before choosing an option.
Home loan settlement vs home loan closure
The two terms have different meanings.
Home loan closure generally means the borrower has paid the complete amount due under the loan agreement.
Home loan settlement involves a negotiated arrangement under which the lender accepts an agreed amount to resolve its claims.
The credit reporting consequences can also differ, so borrowers should ask the lender how the account will be reported after settlement.
What documents should you keep?
If you settle a home loan, keep copies of:
- Settlement approval letter
- Home loan statement
- Payment receipts
- Bank statements showing payment
- Final account confirmation
- No dues or relevant lender confirmation
- Property document release communication
- Mortgage release documentation, where applicable
- Communication relating to the settlement
Don’t dispose of these documents immediately after payment.
What should borrowers check before accepting a settlement?
Before making a settlement payment, check:
- Exact outstanding amount
- Agreed settlement amount
- Payment deadline
- Written approval from the lender
- Treatment of the remaining balance
- Credit bureau reporting
- Status of recovery proceedings
- Property security and mortgage status
- Conditions for release of property documents
- Final account status
If legal proceedings concerning the property are already underway, borrowers should understand the applicable legal process before signing settlement documents.
FAQs about home loan settlement RBI guidelines
Does RBI allow home loan settlement?
RBI has a framework governing compromise settlements for regulated entities, including banks and housing finance companies. Whether a particular home loan is settled depends on the lender’s Board approved policy and the circumstances of the account.
Does RBI fix the home loan settlement percentage?
No. RBI does not prescribe one universal settlement percentage for every borrower. The lender’s Board approved policy determines the applicable process and conditions.
Can an HFC settle a home loan?
Housing Finance Companies are included among the regulated entities covered by RBI’s compromise settlement framework.
What happens if settlement takes more than 3 months?
Under the RBI framework, a compromise settlement where the agreed payment period exceeds 3 months is treated as restructuring under the applicable prudential framework.
Does home loan settlement affect CIBIL?
A settled home loan can affect your credit profile because the account may be reported as settled instead of closed.
Can I get my property documents after settlement?
This depends on the settlement terms and completion of the lender’s requirements. Obtain written confirmation regarding release of the lender’s security and property documents.
Final thoughts
Home Loan Settlement RBI Guidelines provide a regulatory framework for compromise settlements, but they don’t guarantee a settlement or prescribe one fixed discount for borrowers.
The lender must follow its Board approved settlement policy and consider the relevant circumstances, including the value of available security. For a home loan, the property and its security interest can therefore be an important part of the settlement process.
Before accepting any settlement, get the terms in writing, understand the CIBIL consequences and confirm what will happen to the property and related documents after the agreed payment is completed.
