How Should We Handle Employee Loan Requests for Personal Events Like Weddings?

We are a small organization with a 100-member team. One of our employees has requested a loan amount of 5+ Lakhs for his sister's marriage. As this is the first time such a request has been made, I would like to establish a policy regarding this. Please guide me.

I would appreciate your feedback on the following questions:
- What should be the maximum loan amount?
- What interest rate should be applied?
- What should be the period of repayment?

Dear Rogerkevin, For the disbursement of the loan to the employee, there is no standard formula as such. You have to make your own policy. However, a few questions arise about your post. What is the monthly salary of the employee? Rs 5 Lakh is a too big amount. It could take more than five years for the refund of the principal and interest (provided if you levy it). Is your management prepared for this?

Be cautious while disbursing the loan. What if the employee runs away? Secondly, when you give a loan to one employee, another may come up. Therefore, you should have a proper policy on the loan. Do you have it?

I have given an exhaustive reply on the subject of the past query similar to yours. The link is as below:

https://www.citehr.com/524137-employ...ml#post2223617

Thanks,

Regards,
Dinesh Divekar
[Phone Number Removed For Privacy Reasons]

Loan Policy Considerations

The best policy is not to give loans. In any case, it is a bad idea to encourage such an expensive marriage celebration where the employee cannot afford it. There are also certain restrictions imposed by the Payment of Wages Act. Only it calls it an advance. You cannot give an advance exceeding 4 months' salary. Total deductions, including the deduction, cannot exceed 50% of gross wages. Any amount remaining at the end of 18 months cannot be recovered. Of course, the act doesn't apply if the salary is above ₹18,000, but it gives pointers to how the courts tend to think.

Criteria for Developing a Loan Policy

If you are about to develop a policy, then I would recommend the following criteria:

1. The number of years of service depends on the starting point of the gratuity or provident fund as security for the company.

2. Only a loan equal to 3 gross salaries can be given; more can be provided by considering the gratuity amount the company is going to pay if the employee leaves.

3. If you know someone closely and can trust them with a reference, you may also loan them the amount.

4. The loan amount should be recovered in 12-15 monthly installments.

It depends on how many years an employee is eligible for the gratuity or any other benefits the company will provide upon the day of their final settlement. However, when you have an amount in the hands of the employee in the form of gratuity or provident fund, you can decide whether to grant a loan. In the event the employee leaves the company, the employer would have the best chance to recover the amount from their final settlement.

A loan is not an employee's right; it is a favor extended to retain, help, and encourage them to stay with the company.

Protection of PF and Gratuity

Both PF and gratuity are protected amounts. As per law, these cannot be claimed or set off against any money due to the company. In the case of PF, it is not under the control of the company. The amount will be paid directly by the PF authorities and not by the company. They have no right to give nor any authority to stop the amount from being paid. Gratuity can be withheld only in the case of any act of moral turpitude by the employee. Defaulting on a loan does not count as such, and therefore, there is no security in the given case.

While appreciating your company's gesture to help the employee tide over a critical personal financial situation, I think you also need to consider the financial condition and size of your company, as well as the long-term consequences of such a policy. Frankly, I haven't seen many companies of similar size go to such extra lengths, as a company policy or practice, to take care of their employees except on a case-to-case or selective basis.

However, as Dinesh and Saswat mentioned, there could be quite a few pitfalls in such policies which, if not addressed from the beginning, are likely to make such a proactive policy more of a bane than a benefit.

A Better Approach

A better approach could be for the company to partner with a financial institution or bank, as the chances of individuals obtaining loans at reasonable interest rates are lower without company involvement. This would also relieve your company from handling the legal paperwork, due diligence, etc. Legal documentation in such matters must be comprehensive, covering all angles and possibilities, one critical aspect being what Dinesh mentioned, 'What if the employee runs away?', which may require adjustments for each case.

In summary, this model ensures the company acts only as a facilitator, akin to an aggregator like Ola, Uber, etc., in the cab/taxi business.

Regards,
TS

Discouraging Employee Loans

Loans to employees need to be discouraged. As learned members state, it encourages people to live or spend beyond their means. Tying up with financial institutions can be considered, taking all aspects into account, such as when an employee leaves after taking a loan or absconds. The partnership with a financial agency needs to be done with care, keeping all legal angles in mind.

Considerations for Small Advances

Probably small advances like festival advances or two-wheeler advances can be considered with proper guidelines, including the refund procedure, interest rates, surety for the loan, etc. I would not recommend paying loans of Rs 5 lakhs to an employee. First, it becomes a precedent. The recovery aspect if an employee leaves or absconds needs to be kept in mind.

Security Concerns with Gratuity and PF

Gratuity and PF amounts or accumulations are exempt from any sort of attachment in most cases. So, don't bank on the security of PF or Gratuity even if the employee gives a declaration on stamp paper. Encourage employees to save and make a financial roadmap for themselves and not to depend on the employer for loans.