The Debt Panel: 'Can a bank use my gratuity to pay off a loan?'

Dubai resident is seeking advice on how to convince the lender to reverse its decision and release end-of-service payment

Banks will re-evaluate customers' risk profile based on their new employer details, job profile and income. Nick Donaldson / Getty

I have been with the same bank in the UAE for many years. I changed jobs a few months ago and my previous employer transferred my end-of-service payment worth Dh85,000 ($23,146) to the bank.

The lender immediately blocked my gratuity and when I approached it for clarity, I was told that it was because I have a personal loan with them. The outstanding amount for the loan was Dh34,000.

They verbally agreed to release my gratuity payout as soon as I submitted a salary transfer letter from my new employer and copies of my residence visa and Emirates ID.

When my first salary — it is Dh1,000 less than I was earning before — from the new employer was transferred to the account, I received a call from the bank saying that it had arbitrarily decided to use my end-of-service dues to partially pay off the personal loan.

I have a clean record of paying the loan instalments on time and have never defaulted. I was hoping for the full amount to be released after my first salary was credited to the account.

Although I told the bank to reverse the decision and expressed my wish to continue paying the loan as per the contract, they did not oblige.

I feel this is unethical because I submitted proof of my new job and salary details to show my repayment capacity. What can I do in this situation — and is it too late to reverse the decision? FR, Dubai

Debt Panellist 1: R Deepakchandran, group head of retail products at Emirates NBD

Personal loans are a type of unsecured financing provided by banks to individuals who require additional funds for various purposes, including large home renovation projects, debt consolidation or emergency expenses.

When applying for a personal loan, the bank evaluates the applicant's creditworthiness and repayment capacity based on factors such as income, job profile, employer details, length of service, credit history and debt-burden ratio (DBR).

These parameters determine the loan amount, interest rate and repayment period.

If an individual changes jobs, the bank will re-evaluate their risk profile based on their new employer details, job profile and income.

Depending on the new risk profile and DBR, the bank may partially or fully adjust the personal loan against the end-of-service benefit, tailoring it to meet the customer's risk profile and assist them in managing their finances effectively during the transition period.

Meanwhile, the bank may place a lien equal to the outstanding loan amount while the customer provides their new employer details.

If you are changing jobs, it is advisable to contact your bank and explain your current situation.

Most banks will reassess your risk profile. Changing jobs can have a significant impact on your financial profile, making it crucial to maintain open communication with your bank when seeking a personal loan or managing any related changes.

Debt panellist 2: Alison Soltani, founder of Leap Savvy Savers

The first thing to do is review the loan agreement and clarify the rights and obligations of each party.

Be aware that banks often include a clause in the terms and conditions that enables them to collect payment through end-of-service benefit payments, as this signals the end of employment and heightens the risk of a debtor defaulting.

This is especially true if you did not make the bank aware of your change of circumstances before leaving your previous employer.

Secondly, the bank assessed your financial circumstances and deemed you eligible for the loan based on your previous employment contract and income.

If your situation has since changed, banks are usually entitled to make changes in their financing decisions based on a new risk assessment. Again, it is worthwhile checking the loan agreement for clauses related to this.

As your new salary is lower than your previous salary, your debt-to-burden ratio (your total monthly debt payments divided by your monthly income) may have increased.

The bank might, therefore, reduce the outstanding loan amount and block a portion of your end-of-service benefit to enforce this. DBRs in the UAE are set at a maximum of 50 per cent.

Watch: The debt cycle

If this is the case, it seems as though the bank has not explained this to you.

I would recommend visiting the branch and asking to see their customer relationship manager. Explain your situation and ask why they allocated some of your end-of-service gratuity to your loan repayment.

In the event of a salary reduction, most banks allow their customers to restructure their loans with a lower monthly instalment.

Therefore, one option could be to 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.

If the bank does not provide an explanation nor offer you a restructuring deal, file a complaint directly with the bank.

As a customer, you have a right to know the justification for applying your end-of-service benefit to your loan.

If the situation remains unresolved, you could move your business to another bank or file a complaint with the UAE Central Bank, but only once you have attempted to settle the dispute with the bank first.

In future, ensure that you provide plenty of notice to the bank about a change in circumstances and discuss the bank’s intentions with your end-of-service payment before it is transferred to your account.

Debt Panellist 3: Rasheda Khatun Khan, financial wellness expert and author of Millionaire Mindset — 6 Steps To A Wealthy Life

The first step is to look through your personal loan contract.

What does it say regarding early repayment of the loan? Under what conditions can the bank demand full or partial payment?

An even smarter decision would be to then invest what you would have been paying for your loan into a monthly investment

Rasheda Khatun Khan,
financial wellness expert

Know where you stand and what you’re bound by in your contract.

Second is to request to speak to a manager or register a complaint explaining your circumstances and requesting your end-of-year service payment be released in full.

You can also request that your personal loan be restored if you feel your repayments are still affordable and, more importantly, falls within the bank’s affordability criteria based on your new salary.

Should you have no response or resolution, you can escalate your complaint to the UAE Central Bank. This process can ensure your concerns are looked into and the resolution explained.

Simultaneously, you should consider repaying your loan early.

After all, you are most likely to be paying a higher rate of interest on your loan than you would get investing it.

In other words, unless you have plans to make more money on your Dh85,000 than you are paying out for your loan, it makes financial sense to repay your debt.

An even smarter decision would be to then invest what you would have been paying for your loan into a monthly investment.

I suggest you look at what is the best result for you financially and go for that outcome.

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 [e-mail]