Guide for Giving Loans to Employees -  Gains and Pains

By greytHR
5 minute read ● September 20, 2017
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Guide for Giving Loans to Employees -  Gains and Pains

Are you exploring options to attract and retain the right talent in your company? Finding out ways to budget attractive employee perks without having to overrun your working capital? Looking at ways to make your employees’ life easier and build loyalty? Approached by your employees for loans? Does any of the above resonate with you? If yes, then this post is for you.

Due to rapid urbanization, a fresh influx of multinational businesses and a thirst for higher productivity, we have not been able to avoid the keen war for talent. 46% of the employers in India said that shortage of talent will affect their business in the next 12 months. So how can employers drive commitment and productivity while at the same time avoid rampant salary inflation?

“Employee value proposition” has been featured prominently as a solution to this “war for talent.” To stand out to the best and brightest professionals, businesses need to offer pay and benefits that stand out too. And when you’re competing against the Googles and Facebooks of the world, it never hurts to get creative. Studies show that 66 % employees are more likely to stay with an employer who provides good benefits. Benefit packages have evolved from taking care of illnesses to now focusing on the wellness of employees. Financial wellness is the new buzzword in the benefits portfolio.

In a recent study by PWC, it has been estimated that 61% of working adults reported stress from financial difficulties and 52% of employees feel that their productivity at work has been affected by financial problems. Progressive companies acknowledge this trend and use this opportunity to design and introduce new benefits that will augment employee attraction, retention and productivity.

One of the ways to keep employees financially well, is to help with their cash crunch situations. Loan platforms are an effective tool for employers who can quickly address this aspect for employees with minimal administration and demonstrable outcomes.

How are employee loans beneficial?

  • Alleviates financial stress and therefore improves productivity
  • Builds loyalty and improves morale within a small business or office
  • Boosts the business’ reputation as an organization which cares about employees
  • Contributes to employee retention and reduces turnover

What kind of loans can sell as real benefits in today’s market?

Per industry trend analysis, the traditional loan schemes, including car, home, marriage, personal computer, telephone etc. are not going to create much of a value and would only be a financial burden on small and medium businesses in India. Even large companies like Infosys have scrapped these loans citing their non-value addition and as a measure to cut costs. With market evolution, now these loans are easily available outside.

Personal loans: Organizations provide personal loans for employees to deal with emergency financial burdens. Employer sets the limit on the eligibility amount as per the financial health of the company. These can be repaid in equal installments over a specified period in the form of payroll deductions. Personal loans have been perceived as a valuable benefit as every employee encounters a cash crunch situation with marriage, child care, medical, parent care, house maintenance expenses etc. The organizations provide zero percent or a minimal interest rate and this encourages employees to avail this option as the market rates for personal loans are usually very steep. Employers can also make provisions to avail this loan multiple number of times provided there are no outstanding ones. It also would be an innovative idea to call these loans by a different name like employee assistance/support/emergency fund, etc., so that they are more meaningful to the employee.

Hottest Perk of 2017: There’s a new employee benefit making waves in business: student loan contributions. Many employers, including PWC, are helping employees pay their student loans. Data released by Reserve Bank of India shows that outstanding educational loans in India has zoomed from ₹2,986 crores in 2003 to over ₹48,400 crores in 2012. The boom in educational loans and the constant need to upskill has burdened the millennials in India with debt when they enter the workforce. So, setting up elective benefits to help employees handle their student loan repayments via payroll deductions would improve employee morale and productivity, while providing the company with a talent recruitment and retention advantage. This can also be extended to support any education for upskilling while they are employed. Student loan and tuition assistance also ranked highly on the list of coveted benefits, with reports that these bonuses could nudge people toward a job, even if it is comparatively lower paid.

What are the tax implications and obligations?

For employers:

As per the March 10, 2015 amendment to the Companies Act 2013, companies may consider formulating policies for granting loans and/or advances to employees and provide for the same in the offer document/appointment letter. However, there are exceptions in offering loans to shareholders or directors under Section 185/186 of Companies Act, 2013 and they need to be considered.

For employees:

Employees will need to pay tax for the concession they get from their employer. The loan would be non-taxable only if it is below ₹20,000 or if it is used for medical treatment where the disease is a “Specified disease” mentioned in Rule 3A of Income Tax Rules.

What kind of groundwork needs to be done before giving out employee loans?

Here are some pointers to follow before disbursing loans to employees:

  • Set the right limit and interest rate: Most of the small and medium businesses (SMB) face problems if their working capital gets tied up in loans instead of being used to grow the company or if a lot of time and money is invested on loan administration. These two aspects should be taken care of before deciding a limit on the amount of loan and the interest rate that the employees will be eligible. Employers must budget benefits with the same rigor by which they budget payroll, innovation, and building great products and services.
  • Conduct an affordability assessment: Will the employee be able to pay back the loan within a certain period? Are there any other company loans that the employee has already received? Have previous loans been repaid by the employee? Should the employee resign, or be dismissed, will the outstanding amount be recoverable? Can the amount of the staff loan be covered by the value of leave owing, a company pension fund, or by the salary/wages that the employee has accrued up to the date the loan is taken? CIBIL scores or other equivalent credit scores of the employee might come in handy here to ease the verification process.
  • Make it formal: If you decide to lend funds to an employee, be sure that the employee signs a promissory note to repay the loan. The note should spell out repayment terms (frequency of payments; interest rate; what happens in case of a default). There are numerous templates online that you can use to create a binding promissory note, but you might want to run it by your company lawyer to make sure you protect yourself.
  • Documentation of policy and records: The loan policy should be clearly documented in the employee handbook or on the employee portal. It is important to maintain the employee policy records diligently without any scope for ambiguity or misrepresentation.

As per the study of Global employee benefits trends in India, it is learned that a strong benefits and wellness package is a highly effective retention factor for Indian employees – and if they are happy with these programs, they are more committed to their employer.

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