Do you think it is a good idea to outsource the Salary Advance to a third party Finance company? As I see it, the pros/cons are as under:
- Reduced administrative work at HR and Finance
- No blocked funds
- No strain in relationships with Employee
- Employee will need to pay Interest
- Employee data may need to be shared
- Moral Responsibility (if not legal) on the company
Appreciate your views on the same.

From India, Mumbai
Dinesh Divekar

Dear Hifly,

At the outset, I must appreciate you for doing little bit of homework. The general tendency among the members of this forum is to shoot a query and expect spoon feeding. Good that you are not in that category.

Nevertheless, where you have erred is your direction of thinking. Your pros and cons are based on wrong premises. How? Let me explain to you.

First, let us consider definition of "outsourcing". While running an enterprise, we engage in thousands of activities. Few are mission critical and others are absolutely routine. The activities that are "routine", the activities that do belong to the "non-core" category are outsourced. Outsourcing is a sort of delegation between two organisation. The dictionary definition of "Outsource" or "outsourcing" is "Obtain goods or services from an outside supplier; to contract work out". Here, you are not buying anything.

Your second confusion is on employee welfare. Why do we give "salary advance". Giving salary advance is sort of employee welfare. While running domestic activities, employees run short of money. To fulfil these domestic requirements, salary advance is given. Generally, salary advance is given for number of days worked in the month. Therefore, company does not incur any liability as such.

Your third confusion is on "employee loan". This is also a employee welfare. Generally, it is given interest-free. In many companies, they have policy on employee loan. In this policy, criteria is defined on loan eligibility. Generally loan amount is recovered in three to ten instalments. Two guarantors are required to accept the liability for default. Again in this case also company does not have much liability. Yes interest is lost on some amount. But when you calculate, you will find it negligible.

Fourthly, when you say "outsource", what probably you mean to say that employee takes loan from some bank or financial institution directly. All that you wish to do is to route the monthly instalment through your company. Your post implies that the relationship is between employee and the bank and therefore, company is free from liability from non-payment or default in payment.

Fifthly, you say that when employees start taking loan from some bank, then it will free up company's funds and reduce admin activity for HR. But then my dear friend, if loan or salary advance is "employee welfare'" then is this not responsibility of HR? By using the phrase "outsourcing", do we want to "wash hands off"?

Sixthly, large number of payroll software are available. Now a days tracking employee loan is not that difficult. It gets reflected in monthly salary slip itself. Some 25 years ago, when manual operations were there, during that time employee was issued with a book wherein his instalments were recorded. 21st century is IT century even then also, why you should have any problem?

Seventhly, when you say that by disbursing loan funds get blocked then let me ask you a question, what per cent of funds are blocked against revenue or against HR budget? Please confirm on parameters of your calculation also.

Eightly, if employee were to take loan from some bank or financial institution then all that he/she is required is to activity ECS facility. The loan amount gets deducted automatically from his/her account. Why that employee will involve his/her company in between?

Lastly, my dear friend, please note that there is organised business of loan disbursement. The monthly interest charged is between 1 and 2 per cent. Do you mean to say that these people have any software? All the transactions happen in cash. Still they manage very well. They know who is liable for payment, for what time and how much is the amount. Should HR supposed to be smarter than these people? If they can manage everything on their own, why HR of 21st century wanted to do so called "outsourcing"?

My comments may sound uncharitable. However, what I have done is minutely scrutinise the proposal as per my understanding. Please do not take my comments personally.


Dinesh V Divekar


From India, Bangalore
Thanks Dinesh for your detailed response. I will add my response after we get a few more responses. Let me just clarify few things:
a) I am talking about 'Employee Loans' and 'Salary Advance' combined.
b) There are many companies that do payroll processing. What if we get a company to manage the Loans?
c) Employees continue to get the benefit of 'welfare' as the loan disbursement will be seamless. It will continue to be part of the HR process, except that it is funded by a third party.

From India, Mumbai
Hello hifly, We are into Temp Staffing and Payroll Processing, Please do let us know if your company has plans to outsource the same, Regards, Saneesh J M 09745877708
From India, Cochin
Dinesh Divekar

Dear Hifly,

Why employee loans should be that big subject to bother about or even it merits outsourcing that I could not understand.

I conduct the training on purchase and inventory management subjects. In this area, "outsourcing" is a major area of study. Based on the theory of outsourcing, let me ask few critical questions:

a) What is the total count of employees?

b) Do you have well-designed policy on employee loan or salary advance?

c) In the last five years, what % of employees applied for the loan? What is ratio of applications approved Vs turned down?

d) What is the percentage of loaned amount against total HR budget? What % of interest was lost due to the employee loans?

e) How many persons work in loan department? What is the % of man hours spent in handling loan activities against total man hours in HR department?

f) What is the budget for employee welfare? What % of funds are consumed for loans out of total budget for employee welfare?

g) To recover the cost of processing the applications, is it worthwhile to levy some processing charges? Processing charges are different from interest on loan, please note.

h) If third party is involved in the disbursement of loans then what will be cost implications? What savings will you accrue? How will you avoid communication gaps if you start deducting monthly instalments of the loans taken from the third party?

g) In your second post, you say that "Employees continue to get the benefit of 'welfare' as the loan disbursement will be seamless. It will continue to be part of the HR process, except that it is funded by a third party. " Now the question is, if the "third party" starts giving loans, even then also how it will be "employee welfare"? Can you pleas explain. How disbursement will be "seamless" can you please explain?

Other non-financial considerations:

g) If the disbursement of employee loans is stopped then will it impact employee motivation or morale? If yes, is the cost of low motivation or morale measurable?

h) By stopping this facility, how you will differentiate yourself from your competitors? Will it impact the brand image in the job market?

Please consider the above questions for doing Cost Benefit Analysis (CBA). Your decision will depend on how you do CBA.


Dinesh V Divekar

From India, Bangalore

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