Blank Signed Post Dated Cheques for Home Loan Security is an Outdated Practice

I have recently taken a home loan for Rs 18 lacs from a private sector bank. The loan repayment is through Auto-debit to my salary account with the same bank. Yet the bank is insisting on getting 3 undated cheques for Rs. 6,00,000 as Security Post Dated Cheques for use if I default on the loan.

Why is the bank insisting on these Post Dated Cheques for a home loan?

It is a standard banking practice in India to ask for post-dated cheques for loan repayments in India. In this case, since your repayment is by way of auto-debit to the account the bank has taken post-dated cheques for the full loan amount. The main reason for the practice of seeking post-dated cheques by banks is that it is far quicker for the banks to recover money due in a cheque dishonor case than in a regular civil case for recovery of loan dues. Hence the practice has persisted over the years.

Things to watch out for – 

Once you have soiled the sleeve with all the groundwork, you’d want to know non-financial parameters you need to watch out for.

The lender should give you an official receipt of the list of property documents lodged with them as security. This receipt is important if you want to switch your home loan to another bank as the new bank will require to know what documents your existing lender is holding as security for the home loan. Additionally, original property documents in India are valuable and though it is rare, the lender may misplace your documents, and if this happens, it would be difficult for you to prove that the said documents had indeed been handed over to the Bank.

Borrow from a bank that gives a detailed statement of account. Although most Banks give a tax certificate by March 31, not all Banks give a detailed statement of account. This statement helps in demonstrating your repayment track record, should you wish to take any other loan in the future or in the event you wish to switch your home loan lender.

Taxation Certificate

All Banks send a certificate to their customers specifying the interest and the capital paid/payable during the previous financial year to enable you to get the relevant tax benefits on the home loan. Banks provide this certificate as a matter of course. However, in co-borrowers, where both need to claim tax benefits, you will need two separate original copies of the certificate. Find out if your bank is willing to issue 2 separate taxation certificates.

Electronic Clearing System (ECS)

Does your Bank allow an ECS? Some Banks accept an authority letter to debit your Bank account for a fixed sum, in lieu of taking post-dated cheques. An ECS allows the Bank to send debit instructions to your existing Bank account, making it a convenient system of payment.

Banks insist on payment of a fee along with the application form. This fee is normally non-refundable if you choose not to avail the sanction even though the terms may not be in line with your requirements. It is always advisable to agree with the Bank upfront about your requirements and take a letter from the Bank/Agents that the entire fee will be refunded if the sanction is not in line with your requirements or if your case gets declined for any reason.