Very often your house help might ask you for a loan to which you wouldn’t know how to respond. Especially expats, find themselves in a predicament when their help asks for a loan or advance salary to support their families back home. This problem usually stems from poor financial literacy and lesser access to formal lending (like banks) due to which they resort to money lenders and employers for help.
#1. Lending a small loan is fine
Only lend money to your house help if they’ve been around for a long while and you trust them. Don’t lend too much money, a small amount not more than 1-2 months of their salary is alright to lend. You’re not obliged to give a loan. So before lending, ask them the reason for the loan, if they don’t give you a valid reason you can refuse. If they need the loan for specific payments such as school fees or hospital bills you can directly pay the organisation, so you’re assured the money is used for the right reason. Always remember to ask for a receipt regardless of whether you’re making the payment or your house help makes it. Most importantly, don’t give more money until the previous loan is paid back and if possible keep their ID proof/address proof with you.
#2. Pre-decide an interest rate arrangement
Pre-decide an interest rate keeping in mind existing interest rates. Ask your friends, family or neighbours at what rate they lent money to their house help. According to News24, you may deduct up to 10 percent of their salary every month (as interest) until it’s fully paid. Remember that certain expenses and interest earned on the loan given are eligible for tax deductions, so speak to your CA about these benefits. Along with an interest rate, decide a repayment plan spread out over six months in equated monthly installments.
#3. Give alternatives to them
If the loan amount is too much and you’re not comfortable lending money, there are few other alternatives like Pune based start-up- Serv’D Tech Pvt. Ltd. that works towards financial inclusion and economic empowerment of the domestic helpers’ segment. Another alternative is government initiatives like the Pradhan Mantri Jan-Dhan Yojna mission that gives affordable access to financial services (like opening a zero-balance savings account, need-based credit, money transfer services, and insurance and pension) to lower income groups.
And, if they want a home loan there are several companies like Micro Housing Finance Corp. Ltd (MHFC), Aadhar Housing Finance Pvt. Ltd, GRUH Finance Ltd and SEWA Bank that disburse housing loans to low-income groups.
#4. Provide financial advice
Don’t make lending loans a regular practice, instead help them get their financial life in order. You can start by getting all their basic documents in place. Example; organizing their ration card, permanent address proof, and PAN. Once that’s done, they can easily access financial services like bank accounts and insurance. Teach them about the various government schemes they might benefit from and instead of giving a Diwali bonus, gift them life and health insurance as a long-service bonus. Educate them about investment products that help build long-term wealth. Lastly, tell them to avoid taking loans from ‘pat-pedhis’ (unorganised lending societies not regulated by the RBI) or money lenders because they might charge very higher interest rates compared to banks.
Still got more questions? Comment below and let us know.
Illustration by Robert A. Di Ieso, Jr.