Employee Resigns with Loan: How Can a Company Legally Recover the Outstanding Amount?

Suppose a company has a loan policy and also preserves loan applications in writing. Now, suppose an employee takes a loan from the company and after paying some installments, the employee resigns for some reason with a notice period. In such a case, how can the company recover the outstanding loan amount from that employee? Can it be recovered from the nominee? Is it legal?

Hi, In general, many companies make loan policies applicable to employees only after they have completed a considerable number of years of service. This means an employee will become eligible to apply for a loan only after completing the stipulated period of service.

The next criterion
The quantum of the loan should be sanctioned based on the employee's current Cost to Company (CTC).

The third criterion
You can request a letter from the employee regarding the loan amount and details about the EMIs. If the loan amount is on the higher side, obtain a self-declaration on a 100 Rupee stamp paper stating that the employee will repay the loan within the stipulated period.

In the case of resignation
The Full and Final Settlement (FFS) can be withheld. Obtain a cheque/DD from the employee for the balance amount, and once it is cleared, the FFS can be released.

Thank you for your reply, sir. What if the company has not maintained the ₹100 stamp paper for the same?

In this case, the employee resigned. Therefore, the dues shall be recovered either in Full and Final (F&F) settlement or prior to F&F. Recovering from the nominee does not arise.

Under the general rule, for all employees covered under the Payment of Wages Act, the total deduction cannot exceed 50% of gross wages (75% if paying to a cooperative society). However, in the case where the employee has resigned, the last payment can be fully deducted to settle the outstanding loan.

Review Loan Documentation
It is essential to review the documentation of the loan. If there is evidence that the loan was not related to the employment, then you cannot withhold the settlement for the outstanding loan.

Adjustment of PF and Gratuity
Moreover, amounts like PF and Gratuity can be adjusted for any outstanding loans. If necessary, you may need to file a civil suit after the payment to recover the same.

Dear Laxmi,

Employees request loans, either short-term or long-term. It is purely at the discretion of management. When a loan is given, the lender must secure its repayment. If they do not pay sufficient attention to it, the employer suffers.

Short-term loans

A short-term loan is for a maximum period of 6 months. It can be against the annual bonus, otherwise not more than 50% of the employee's wages for the next 6 months.

Long-term loans

A long-term loan should not be provided by the employer as it is not their business. They can arrange with a bank or cooperative bank to allow employees to get loans from there. Even if the employer gives a long-term loan, it should be for a large amount for purchasing assets like a car or house. The company can then mortgage that asset so that if the employee separates, there is a balance amount to be repaid, and the asset remains with the company, ensuring the company's safety.

Vibhakar Ramtirthkar.

In our organization, the loan policy states that we provide a loan not exceeding one month's salary. The loan is granted only after another employee, whose salary is equal to or more than the loan amount, provides a written undertaking that in case of default, they will repay the loan.

Members have also raised other aspects.

Regards, Col. Rathi

Recovery of a loan from an employee's nominee

Recovery of a loan to an employee from his/her nominee comes into force only after the demise of the employee and not during his lifetime if he/she has left the services of a company to join any other company/organization.

The nominee shall step into the shoes of the employee only upon the demise of the employee. They are required to repay the deceased employee's loan only to the extent of what they received in succession after his/her demise and not otherwise.

If the employee is alive and has joined another company, the only course for recovery is to file a money recovery suit with the appropriate forum. Success in this process will depend on whether the company has all the documents related to the loan application, actual disbursement of funds through cheques, and details of any partial repayments made from monthly salary deductions.

Regards, Jawaharlal Moondra
[Phone Number Removed For Privacy-Reasons]