I'd warned you not to miss out on your EMI payment, didn't I?" Roshan Tyrewala scolded his younger sister, Ayesha.

"Now, you'll have pay the penalty to the bank which loaned you the amount (the loaner bank). You'll also have to pay the 'cheque-return' fee to the bank where you have your account on that missed EMI," he added, half in jest, half in anger. 

Ayesha had bought a two-wheeler on loan from a prominent private sector bank on her 21^st birthday.

Roshan enjoyed teasing Ayesha; at the same time, he wanted her to understand the pitfalls of financial indiscipline and of missing out on her EMI payment. 

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Ayesha, who had been working at an HR firm close to her house over the past two years, couldn't understand her brother's ire. 

"So what if I've missed on my monthly installment?" she replied casually. "I'll make up for it by issuing another cheque to the loaner bank and the matter will end there, right?"

Roshan, who is a banker, told her the process was not so simple. She now had to pay about Rs 700 more for that missed EMI.

When you take a loan from a bank, you issue post-dated cheques in the bank's favour. PDCs are cheques with a future date on it issued by a person taking a loan to the bank from which he takes the loan.

For example:

Ayesha has taken a loan to buy a vehicle from her bank. She will be paying back the loan over a period of next two years. So she issues 24 PDCs to the bank. Each PDC will have a date (for example, Feb 7, 2007, March 7 2007, etc) and her EMI amount.

The loaner bank deposits these cheques in its own account on that particular date (the dates mentioned on cheques) every month. They are then sent to the loan taker's (your) bank account where they are encashed. 

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If your bank account doesn't have enough money to honour the cheque (pay the amount mentioned on the cheque), it goes back to the depositor (in this case, the loaner bank). 

The bank where you have your account imposes the penalty first. While this amount differs from bank to bank, some banks charge Rs 224 for such transactions.

The bank charges this amount because it has spent its time and resources to verify your signature on the cheque, to check if you have the requisite amount in your account as well as to send the cheque back to the loaner bank in case of inadequate funds.

Once he had explained this process to Ayesha, Rohan dropped his next bombshell. "This is not the end of it, dear sister," he teased.  

"You mean I'll have to fork out more than this for my missed EMI payment?" Ayesha whimpered nervously.

"Yeah," Roshan grinned. 

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The loaner bank has also incurred costs in sending your PDC to your bank.

They will recover their cost by slapping a fine on the issuer of the cheque (in this case, Ayesha) for failing to honour a commitment. This is done to recover the money spent by the loaner bank to transfer the money from your bank account to its own account. 

They will also need to spend money to recover their dues by sending an agent (usually a third party to which banks outsource their collection efforts) to collect the missed EMI payment cheque from you. 

In return, the bank has to pay this third party a commission which, obviously, will come from your penalty amount. A friend of mine who missed out on his two-wheeler EMI payment paid Rs 400 as penalty to the bank's collection agent who came calling. Of course, you do get a receipt for this amount. 

While you may find it annoying to pay the fine, what you will find even more difficult is fix up a mutually convenient date and time to meet with the collection agent. 

He wants to come when it suits him. Unfortunately, at that time, you may have to be in office because your boss wants an important presentation to be prepared, or such other irritants. 

Remember, a collection agent fixes his schedule in a manner that will allow him to collect money from as many defaulters from a designated area as possible. If your locality doesn't cover his area of calling, he will find 10 different excuses to put you off. 

On your part, you are so loaded with work that you hardly have enough time to spend with your near and dear ones; to find time for somebody who is as intimidating as a collection agent is a task indeed. 

"Oh, I see," murmured Ayesha as reality began to dawn on her and she began to calculate the price she would eventually pay because of a missed EMI payment.  

"While getting monetarily penalised for a missed EMI may be annoying, finding time to meet the collection agent is exasperating to the extreme," Roshan emphasised again.

Now, do you really want to miss that EMI payment?