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Picture Courtesy: The Indian Express

Context:

The Kerala government has introduced the Kerala Single Dwelling Place Protection Bill, the first state-level law in India aimed at protecting borrowers from losing their homes when they default on loans secured against their single dwelling place. This law applies to all financial institutions operating within Kerala, including banks, co-operative banks, and Kerala State Financial Enterprises (KSFE). 

Current status:

• Overall Loan Default Rate: The Reserve Bank of India (RBI) reported that the gross non-performing assets (GNPA) ratio for banks rose to 2.6% in September 2024, a 12-year low. However, projections indicate that this ratio could increase to 3% by March 2026 under baseline scenarios, and potentially up to 5.3% under adverse conditions (Source: Business Standard) 

• Credit Card Defaults: Defaults on credit cards have escalated, with non-performing assets (NPAs) increasing by 28% to ₹6,742 crore in the 12 months ending December 2024 (Source: Angel One) 

• Smartphone Loan Defaults: Delinquency rates for smartphone loans have risen to between 2.7% and 2.9%, surpassing the generally acceptable rate of 2%. This surge is attributed to aggressive marketing of premium smartphones and consumers' struggles to repay loans for high-end devices (Source: The Economic Times)
• Housing Loan Defaults: In contrast, housing loan defaults remain relatively low, with NPAs at 1.1% as of June 2024. This stability is partly due to the long-term nature of housing loans and the essential need for housing (Source: ETBFSI.com) 

• Fintech Personal Loan Defaults: The fintech sector has experienced a significant rise in defaults, with overdue loans exceeding 90 days reaching 3.6% by March 2025—the highest in six quarters. This increase is particularly notable in Tier-3 cities and rural areas, where economic resilience is weaker (Source: Money life) 

• Microfinance Loan Stress: Non-Banking Financial Companies (NBFCs) involved in microfinance have seen a rise in stressed assets, from 3.9% in September 2024 to 5.9% in March 2025. This uptick is attributed to increased write-offs and credit risks, especially in small-ticket personal loans below ₹50,000 (Source: Business Standard) 

Loan Default Definition:
Loan default occurs when a borrower fails to repay a loan as per the agreed terms, either by missing scheduled payments or failing to repay entirely within a specified period.

Types of Defaults:

• Delinquency: Late payments or missed payments within a short period.
• Non-Performing Asset (NPA): A loan overdue for 90 days or more is classified as an NPA by banks.

Causes of Loan Default

• Loss of income or unemployment
• Poor financial planning or over-borrowing
• Economic downturns or inflation
• Health emergencies or unexpected expenses
• High-interest rates or unaffordable EMIs

Impact on Borrower

• Credit score deterioration
• Increased interest rates or penalties
• Legal action or asset repossession
• Difficulty in securing future loans

Impact on Lenders

• Financial losses
• Increased provisioning for bad loans
• Reduced liquidity and profitability
• Stricter lending norms

Risk Mitigation Measures

• Credit assessment and scoring before loan approval
• Monitoring borrower’s financial health
• Loan restructuring and flexible repayment options
• Insurance products like credit life insurance

Regulatory Framework

• RBI guidelines on classification of NPAs and provisioning
• SARFAESI Act allowing lenders to recover dues by selling collateral
• Implementation of credit risk frameworks and Expected Credit Loss (ECL) models

Social and Economic Implications

• High default rates can signal economic stress
• Defaults affect the banking sector’s health and credit availability
• Government intervention may be needed to protect vulnerable borrowers 

Kerala Single Dwelling Place Protection Bill, 2025:

Key Provisions of the Bill

Eligibility Criteria:

• Annual family income must be below ₹3 lakh.
• Total outstanding loan amount, including principal, interest, and penalties, should not exceed ₹10 lakh.
• The mortgaged property must be the only dwelling place.
• The property size should not exceed 5 cents in municipal areas or 10 cents in rural areas.
• The loan must have been used for specific purposes such as education, medical treatment, marriage, house construction/renovation, agriculture, or livelihood creation.
• The borrower should not own any other property.
• The borrower must possess an Aadhaar card.

Protection Mechanism:

• If a borrower meets the above criteria and faces eviction due to loan default, they can apply to the District-Level Dwelling Place Protection Committee.
• This committee will assess the case and, if necessary, recommend the State-Level Committee to take over the loan repayment, potentially absorbing it into government housing schemes.
• An annual fund of ₹10 crore is proposed to support this initiative. 

Challenges:

• Rising Loan Defaults: Kerala has witnessed an increase in non-performing assets (NPAs) in the housing and personal loan sectors, impacting many low-income families. 

• Evictions: Many families face eviction after defaulting on loans secured against their sole dwelling, leading to homelessness and social distress.
• Limited Financial Support: Existing central laws like SARFAESI Act, 2002, offer limited protection for small borrowers, especially those with loans below ₹10 lakh. 

• Economic Vulnerability: A significant proportion of borrowers in Kerala fall under the low-income category (annual income below ₹3 lakh), making repayment difficult.  

• Legal Complexity: Conflicts between state-level protective laws and central banking regulations create enforcement challenges. 

Government Measures:

Way Forward:

• Strengthen Regulatory Frameworks: Enhance oversight of lending practices, especially by NBFCs and digital lenders, to prevent predatory loans. 

• Promote Financial Literacy and Awareness: Conduct widespread financial education campaigns to help borrowers understand loan terms and avoid over-indebtedness. 

• Expand Social Safety Nets: Scale up schemes like Kerala’s Dwelling Place Protection and Haryana’s Deen Dayal Lado Lakshmi Yojana to cover more vulnerable groups. 

• Encourage Use of Technology: Use digital platforms to simplify loan applications, monitoring, and grievance redressal. 

• Strengthen Recovery and Rehabilitation: Focus on rehabilitation of genuine defaulters through restructuring rather than aggressive recovery. 

Source: Indian Express