Banks and lenders in India are mandated to follow certain norms while dealing with a loan default case. For defaults on repayment of secured loans such as a home or car loan, borrowers are mostly concerned about losing the financed asset like the house, car etc. However, borrowers must note that in case of default, they do have some basic rights that have to be adhered to by the lender.
In this article, we’ll highlight the rights of any loan defaulter and the process that a bank or lender must follow while recovering the loan from any defaulter.
What if a borrower fails to repay the loan?
Borrowers must be cautious about loan repayment and how it can impact their future capability to access finances. Here are some of the top ways in which one can avoid loan defaults:
- Increase your loan period to make your EMIs affordable.
- Organise your finances and restructure the loan before resetting the loan terms and conditions.
- Request for temporary relief for any temporary financial troubles. However, for such requests, you may be charged a penalty fee.
- Lower interest rates through conversion of unsecured loans to secured.
- Banks may sometimes provide an option of loan settlement through a one-time settlement. However, this option should be the last resort since it can reflect poorly on your credit score.
What are the rights of a borrower if he/she can't repay a loan?
Here are the top rights of a borrower in case he/she is unable to repay a loan:
- Right to privacy
Banks and lenders may often engage recovery agents in case a borrower defaults on a borrowing. These agents coerce borrowers for loan repayment to be made at the earliest. However, during such a process, the borrower’s right to privacy must be respected by the lender. Recovery agents can only contact a borrower at a place that is specified by the borrower. In absence of the same, the agents can contact him/her at the place of residence or borrower’s workplace.
- Right to gain balance proceeds
In case a bank or lender auctions the security or collateral for recovering a loan and if the sale proceeds are higher than the total dues to the bank, a borrower must receive the balance proceeds from such sale. In case a borrower’s asset has been repossessed, it is important that the auction process be monitored. The reason is that lenders may refund excess amounts from the sale after having recovered their dues. Therefore, the borrower should make sure that the amount is refunded by the bank in a timely manner.
- Right to fair valuation of assets
Often, the property value is much higher than what a borrower owes to a lender in terms of dues. The bank or lender will most likely be interested only in realising the value of the dues, which may not cater to the borrower’s best interests. Therefore, to ensure that a borrower gets a fair valuation of collaterals, the RBI has set guidelines on the same.
As per the SARFAESI Act, before a repossessed asset is sold, the bank or lender must ensure that the valuation of the same is done by an approved valuer. To comply with these guidelines, banks have established detailed criteria for value empanelment and only the listed valuers are considered. This helps in ensuring that the repossessed asset is liquidated at any price that is unilaterally decided by the bank.
- Right to be heard
A borrower who defaults on a loan or borrowing has a right to object to a repossession notice within the notice period if communicated by the bank. This mandates the authorized officer to respond within 7 working days to inform the borrower about acceptance or denial of objections by providing valid reasons.
- Right to polite treatment by the lender
Since banks are regulated entities, these cannot mistreat or harass a borrower for defaulting on a loan. The bank or lender has to follow certain norms while communicating with a borrower who has defaulted. One such norm states that any collection officer or bank agent who is on the task of recovering debt must politely request the borrower for repaying the debt. This must be done at an area and time convenient to the borrower.
The recovery agent can meet a borrower only between 7 am to 7 pm. The collection agent must treat the borrower and his/her family with due respect and ensure no humiliation is caused. They cannot harass or use abusive language with the borrower.
- Right to advance and sufficient notice
Defaulting on loan repayment is not considered a criminal offence. It falls under the category of civil wrongdoing, except in case of fraudulent or dishonest intent on the borrower’s part while availing a loan. The right to sufficiently advance notice allows the borrower to be informed about a potential action on part of the bank and allows the borrower sufficient time to act. Most banks and lenders give a 60-day notice as per the SARFAESI Act before initiating securitisation of the pledged asset.
What can a borrower do to avoid legal actions post loan default?
A borrower can approach the bank or lender to discuss the existing problem which would have resulted in loan default. Borrowers can request additional time for making the repayment or restructuring the loan.
Borrowers can request the bank to increase the loan tenure and reduce the EMI amount. This can minimise the debt burden and the borrower can pay off the debt easily.
If there is no other option left, a borrower can request the bank for a settlement. If allowed by the bank, the borrower can pay a portion of the outstanding loan balance. While this can be a relief for the borrower, it can negatively impact one’s credit health. For any future credit needs, the borrower has to make full payment of the debt.
You Still have Rights, even if you have Defaulted on your Loan Repayments
While banks and lenders have the right to recover a loan or credit extended to a borrower, it has to be done keeping in mind the rights of the borrower too. Violating the rights of a borrower can mean trouble for the bank as the borrower can take legal action against the bank in this regard.
- Is a loan default considered a criminal offence?
No, loan default falls under the civil offence category. Therefore, it is not considered a criminal offence.
- What happens if you default on a personal loan in India?
If a borrower defaults on a personal loan in India, he/she is liable to pay off the debt and may be booked under a civil offence law, however, no criminal offence can be charged for the same.
- What are your rights if you can't repay a loan?
Some of the rights of borrowers who cannot repay a loan include, right to fair valuation of assets, the right to be heard, the right to be treated politely, the right to advance notice, etc.
- Can you go to jail for not paying off a loan?
No, non-payment of a loan does not land one in jail since it is considered a civil dispute.
- What will happen if I can't pay my online loan?
In case you fail to pay an online loan, the lender will send a notice asking for quick repayment of the same. Some lenders may charge a penalty for non-payment of dues on time.
- What will happen if I am not able to pay 1 month of EMI?
Missing out on timely payment of EMIs and non-payment of dues can significantly impact your credit score. This results in reduced chances of accessing credit facilities for future financial needs.
- How can I sue a bank for negligence in India?
In case of negligence on part of a bank in India, the borrower or account holder can file an FIR against the bank to take legal action against it.