Insights on Implementing Personal Loan Policies for Employees

Dear CiteHR members,

At my organization, we are contemplating the idea of providing a Personal Loan facility to our employees. This loan amount could be for the purpose of house renovation, funding for family functions, or buying a new vehicle.

Can I request you to share with me the nature of similar policies in your organization? You could write a gist about the nature of a similar policy. Also, please mention the industry that you represent.

Best Regards

Hi,

I am from a chemical manufacturing company. We have a similar policy in place, wherein we have included the following:
- Purpose: clearly defined
- Employees eligible: those who have completed x number of years of service with the organization
- Amount eligible for: Can be based on a percentage of basic salary or x months of basic salary
- EMI payable: Interest-free or subsidized interest, payable over x number of years/months
- Approval authorities
- The procedure for availing the loan in detail
- Form for loan application as an annexure
- Specify whether the loan will be considered as a perquisite and provide the calculation for the same
- General rules in case of separation, pre-closure, cap on the number of times it can be availed during the tenure of service, etc.

Hope this information is helpful.

Regards,
Anuradha

Hi, I am from the Construction Industry, and we have a similar facility. We include the following:

Purpose of Loan: Family Functions/Purchase of a house/renovation/emergency
Amount of Loan: Gross salary x 2 (Maximum up to 1 L)
Repayments: 24 Equal EMIs, Without any Interest
Eligibility: Confirmed Employees only

We will make an agreement between the employee and employer consisting of mutual understanding and take a cheque as surety (must be returned after completion of the loan).

Hope it will help you formulate a policy to facilitate your employees through emergency/personal loans.

I am from the electrical industry, but we do not have such a policy. Being an ex-banker, I feel that I will be in a better position to reply to your queries. I think that when you are providing a personal loan facility, there is no need to quote the reason, i.e., for house renovation, family function, purchase of a new vehicle, etc. These three types of facilities can be classified as:

1) Personal Loan - for family function, for house renovation - UNSECURED FINANCE
2) Purchase of a new vehicle - SECURED FINANCE

You might be thinking why two loans are classified as Secured & Unsecured, but it is banking terminology and in your case, both loans are secured as you are financing to your permanent employees only.

You may not insist on any supporting documents for a personal loan, but I feel they are a must for the purchase of a new vehicle. I think you should check whether the new vehicle is for the usage of the employee himself or for his family member because a vehicle purchased with the company's finance should be for the usage of the employee himself or his/her family members. I don't know whether you are financing 100% or 70% of the vehicle and that too with or without any interest. If your company is financing without interest, then it is a must for you to check the usage of the vehicle. It may be possible that the employee already has a vehicle and is buying a new vehicle for the usage of his/her relative/friend from whom he may charge interest to create a new source of income. I think you should be vigilant while financing a personal loan too. In a personal loan, you may set a rule that it will be available only after completion of the tenure and not in between where an employee closes his loan before the stipulated tenure.

I am enclosing herewith a format of the application for a vehicle loan for your reference. You should obtain the following listed documents before disbursement and after disbursement for a vehicle loan:

1. Quotation of the vehicle stating ex-showroom price and on-road price - before disbursement with the application.

2. Advance if any paid by the employee (if you are financing 100% of the ex-showroom price then necessary, and if you are financing 100% of the on-road price then not required) - before disbursement with the application.

3. Copy of the Registration Certificate of the vehicle with the company's hypothetical charge - Post disbursement.

4. Cover note of insurance of the vehicle with the company's hypothetical charge - Post disbursement.

I think you should obtain a Hypothetical Agreement of the vehicle which should be signed by both the employee and employer over and above your normal documents. Presently, I am not having, but I will provide you in due course of time.

A. Prakash

What is the amount of loan being planned?

How will you tackle any case of an absconding employee?

What is the aim of this personal loan facility?

How do you intend to verify the end use?

Look around and see how other companies that have this policy are handling the matter.

Analyse the pros and cons.