When a borrower fails to pay loan EMIs on time, as per the loan agreement, he is termed as a loan defaulter. Being a loan defaulter doesn’t get you labelled as a criminal. And it certainly doesn’t take away your rights to be treated fairly and with respect. 

Banks and Financial institutions have a liability to follow a process when handling a loan defaulter. In this article, we’ll discuss the rights of a loan defaulter and therefore the steps a bank, NBFC, or a financial organization follows to recover the cash borrowed by the defaulter.                

Letting go of an asset funded through life savings can be a very sad experience. However, you need to be prepared for it, in case of an unexpected slowdown-induced job loss or business failure. Remember, despite the default, the borrower doesn’t surrender all rights to the asset or to fair treatment.

Lenders need to follow the due process of law while initiating proceedings to recover their dues. In case of secured loans, the underlying mortgaged assets can be repossessed by the lenders under this act that is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act. However, they can't do so without supplying you with adequate notice.

Additional Reading: What is Defaulter or Negative List?

Here are the rights you’re entitled to as a defaulter: 

Right to Notice

The bank, NBFC, or a financial organization must offer you enough time to repay the dues before taking action to repossess your assets or recover the outstanding amount. The Securitisation and Reconstruction of monetary Assets and Enforcement of Security Interests (Sarfaesi) Act states that the bank can initiate the proceedings as follows:

  • If the loan is assessed as a Non-Performing Asset (NPA) and therefore the repayment is overdue by 90 days, the bank or the financial institution has to issue a 60-day notice to repay the dues.
  • If you fail to repay within the required notice period, the bank can then sell your assets/property.
  • Before selling the assets, the bank or financial organization must provide another 30-day public notice mentioning the upcoming sale.

Right to Fair Value

If you fail to clear the dues within the notice period, the bank repossesses your assets, but cannot decide the asking price on its own. Along with the one-month repossession, a notice specifying the fair value of the asset, along with the reserve price, date and the time of auction evaluated is issued to you by the bank officials. 

If you are feeling the sale price is underpriced, you've got the rights to raise objections and state a price that you feel is true . The bank considers your right to receive fair value for your property then the property is reevaluated by them. You have the right to look for a replacement buyer and introduce them to the lender, if you feel that the asset is undervalued.

Right to Be Heard

You have a right to raise an objection to the repossession notice sent by the bank during the notice period. The authorized officer has got to reply within 7 days, informing you whether your objections were accepted or denied, giving valid reasons.

Additional Reading: How to check CIBIL™ defaulter list

Right to Claim the Balance

There could be an opportunity of getting a high sale price for your property that had been repossessed by the bank. If the bank has some balance left after recovering the outstanding balance, you've got the rights to claim the balance amount. Even if your asset is repossessed, monitor the method of auction. Lenders are sure to refund any excess amount realised after recovering their dues. Ensure that you get this money because it legitimately belongs to you.

Right to be Treated Politely

Banks are regulated entities. They cannot nor do they have the right to mistreat or harass you for defaulting. The bank has got to keep certain things in mind once they are communicating with you.

  • A collection officer/bank agent has got to politely request to satisfy you at an area and time that’s convenient for you.
  • The agent can meet you only from 7 AM to 7 PM.
  • The collection agent is meant to treat you and your family with respect, without humiliating, harassing, or any usage of abusive language.

Lenders often seek the help of recovery agents to coerce borrowers to repay their loans. However, the agents cannot cross the road that banks have prescribed as a part of their code of commitment to customers. These third-parties can contact defaulters either at an area specified by the latter, residence or workplace. Moreover, they can make such visits only at specified times during the day. They cannot violate norms of decency and civil behaviour during their visits. In case the agents plan to intimidate or humiliate the borrowers or their relations, the latter can raise the matter with the lenders and eventually , the banking ombudsman offices.

Additional Reading: Personal Loan For Defaulters

Take all the Necessary Precautions to Avoid Loan Defaults 

The whole focus of any borrower must be the repayment of the loan amount on time, keeping with the repayment schedule. But sometime after taking the loan, some borrowers may find it difficult to pay it back due to unforeseeable circumstances. During these types of situations, do not hesitate to get in touch with your bank. Once you notify your bank about the situation and convince them that you will pay off the loan, they might financially assist you in these types of situations. You can request your bank for the following:

  • Increase your loan period to make your EMIs affordable.
  • Organise and restructure your loan and reset some of the terms and conditions.
  • Take up temporary relief if you are facing a temporary financial problem. However, you can be charged a penalty, in this case.
  • To lower the interest rates by converting your unsecured loan to secured.
  • Sometimes Banks give you an option to settle the loan through a one-time settlement payment. But, choose this option as the last option because it can reflect negatively on your credit score.