Abu Dhabi, UAEMonday 27 May 2019

The Debt Panel: Can my bank use my gratuity payment to reduce my loan?

The Dubai HR manager was paid her end of service benefit after losing her Dh40,000 job at the end of last year

Illustration by Mathew Kurian
Illustration by Mathew Kurian

I've heard that taking money to reduce debt is against the Central Bank of the UAE regulations. If this is the case, does it mean a bank cannot use a gratuity payment against an outstanding loan?

I have a loan of Dh500,000 with an Islamic bank in the UAE. I borrowed the money to finance some properties in the Philippines, where I am from. I used to be an HR manager for a construction company but I was made redundant towards the end of last year when my salary was Dh40,000.

I was then paid a gratuity that I do not want to use against my debt. When my ex-company transferred my end of service benefit to my account, the bank blocked it. I'm now trying to negotiate with them to release it. They said, as per Central Bank regulations, they can use it against the liability. I told them if they do this, they should also 'restructure' my loan.

I now have a job with another company as a personnel manager with a reduced salary of Dh30,000. I gave copies of my new visa and salary certificate to the bank and also made a request through the representative, who initially facilitated my loan, to release the gratuity since I now have a job. Though this is still under negotiation, the bank says it will deduct the gratuity against my debt and consider reducing my monthly payment (due to my lower salary); however, it also might increase the profit rate, as it says my new company is not 'listed' with them.

I live in Dubai, am single and my Dh9,000 in monthly expenses include Dh4,500 for rent, Dh1,000 for utilities, Dh500 for phone/internet and Dh3,000 for remittances. Can you give me some clarity on whether I can have my gratuity released. I'm in dire financial straits right now and still not in a stable job. SM, Dubai

Debt panellist 1: Shaker Zainal, head of retail banking at CBI

What a bank can and cannot do regarding collections and payments is documented in detail in the loan agreement you signed with the bank. First review the agreement and clarify the rights and obligations of each party. However, beware that usually banks do include a clause in their loan agreements, which entitles them to collect their receivables through end of service benefit payments as well. Therefore, it is very likely your loan agreement includes a similar clause.

Because your new salary is lower … the bank can therefore ask you to reduce the outstanding loan amount, and block your end of service benefit to enforce this, based on the terms and conditions of your loan agreement.

Shaker Zainal, CBI

Secondly, the bank had decided to give a loan to you by considering your financial circumstances, including your monthly income, which were valid at the time of your loan application. If your circumstances have since changed, based on the terms and conditions outlined in your loan agreement, banks are usually entitled to make changes in their financing decisions. They can continue to hold your end of service benefits until you put in place a new loan agreement with the bank based on your revised financial circumstances.

Because your new salary is lower than your previous salary, for instance, the outstanding loan-to-salary ratio (the multiple) and the debt-burden ratio (your total monthly debt payments divided by your monthly income) must have increased. The bank can therefore ask you to reduce the outstanding loan amount, and block your end of service benefit to enforce this, based on the terms and conditions of your loan agreement.

In the event of a salary reduction, most banks allow their customers to restructure their loans with a lower monthly instalment. Therefore, approach your bank, explain your new financial circumstances, explore the feasibility of restructuring your current loan and resolve your blocked gratuity as part of the new loan arrangement as well. You should also note that there are regulatory requirements in the UAE, which caps your debt-burden ratio at a maximum of 50 per cent. This ratio will impact the structure of your new loan.

If the application to your existing bank has been unsuccessful, another avenue you can explore is to apply for a buy-out loan to another bank and fully pay off your existing loan. However, you need to be mindful that if you had overdue payments before you found your new job, this will negatively impact your Credit Bureau rating and decrease the likelihood of a successful loan application.

The good news is that with a Dh30,000 monthly income and Dh9,000 monthly expenses, you have a comfortable pre-loan monthly cash surplus to successfully get your cash flows under control again. This is even before considering to sell some of the properties you have bought in your home country or using your gratuity to make a balloon payment on your existing loan and reduce your monthly loan repayments, if needed.

Debt panellist 2: Keren Bobker, an independent financial adviser with Holborn Assets

It is common for banks to freeze accounts when notified that someone is leaving a job. This is mainly to stop debts accruing when there may not be a future income to repay them. However, the issue of retaining a customer’s money is quite a contentious area. It is still common practice for banks to take a person’s final salary payment and end of service gratuity payment and apply this to reduce an outstanding debt — even if a person is shortly to start a job. For the bank, it ensures the customer will not miss any loan repayments.

I suggest you check the terms of the loan agreement to see if you agreed to this eventuality. I note that you mention that the bank has said it may increase the interest rate and again, this must be provided for in the loan agreement as it is contrary to general banking regulations. UAE Central Bank Regulations Regarding Bank Loans and Services, issued in February 2011, Article 15 a) states: “Banks or finance companies are not allowed to alter or vary terms and conditions for granting the loan or the facility during the tenure of the loan or the facility, unless agreed to in writing by the borrower.”

Using other funds to reduce a debt is also covered in Article 371 of the Commercial Transactions Law, which states that banks can "acquire ownership of … deposited money" and “save where the deposit is intended for investment, a deposit shall be considered a debt and clearance may be effected between a deposit and a debt owed to the bank by the depositor".

These clauses have been put forward by banks to win cases in court for using deposits to settle debts. Therefore, it appears the bank has to right to hold on to a gratuity, if individual circumstances have changed.

Debt panellist 3: Ambareen Musa, founder and chief executive of Souqalmal.com

Banks in the UAE can claim immediate payment against a loan under a number of circumstances. These include (but are not limited to) non-payment of three consecutive or six non-consecutive instalments, when the borrower leaves the UAE permanently, and when end of service benefits are credited to the bank account signalling end of employment or termination.

When end of service benefits land in your bank account, it raises a big red flag if you have outstanding debt with your primary bank. The bank can freeze the funds in your bank account including your final salary and gratuity until it is satisfied that there is no risk of a potential loan default.

In your case, it appears your bank has seized the gratuity for three reasons: first, you failed to keep your bank in the loop before your final salary hit the account. Doing so could have helped you notify the bank of your intention to find a new job immediately and keep up with your repayments. Second, since you weren't able to secure another job immediately and the bank wasn't made aware of any change of employer at the outset, it was prompted to freeze your account to ensure repayment in case of loan default. Third, now that your salary is significantly lower and you're working with an unlisted firm, the bank places you in a higher-risk category. This justifies the precautionary measures used by the bank in the current situation.

Given your current expenses, it still looks like you have enough left over to keep up with your loan repayments. At this point, consider letting go of the gratuity as partial settlement towards the debt. This will help you reduce your overall loan tenure and become debt-free sooner — especially as the bank may now increase the profit rate on the remaining finance amount. Making a penalty-free partial settlement could eventually work out in your favour in the long run.

If you still want to pursue the case further, lodge a formal complaint with the Central Bank by filling out a form on the website or calling their toll free number 800 CBUAE (800 22823).

The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to pf@thenational.ae

Updated: March 12, 2019 04:48 PM

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