In the modern and urban lifestyle of today, it’s impossible to handle all of one’s financial requirements without resorting to loans. Whether you are looking to buy a car, purchase your dream home, start a new business venture, or fund your personal expenses – loans have become an inevitable part of modern living.
Not to forget, certain loans like home loans come with tax benefits, making them a preferred choice for all. However, life is full of surprises. There are plenty of times when things don’t go as per plan. You may lose your job, acquire a critical illness, or meet with a financial windfall making it difficult to continue with your loan repayments.
Irrespective of your current financial scenario, it pays to be aware of the repercussions of not repaying your loan. What happens if you cannot repay your loan? Do you have any rights as a loan defaulter, or are you at the mercy of the lender?
This article finds answers to these questions, helping you be prepared for the worst-case scenarios.
Before, we take a look at the rights of defaulters; let’s clear up a few basic things that you should know:
Defaulting (the inability to repay a borrowed bank loan) is not a criminal offense in India, unless the courts find out there is a fraudulent motive.
The court recognizes that defaulters need protection, as there may be a genuine reason why they are unable to pay. Civil courts in India give due weight to genuine, lawful reasons.
Loan defaults in India are a civil offense. Criminal charges cannot be placed on a person for not repaying a loan. It means, police cannot arrest you because you’re unable to pay back the loan.
However, note that these rules apply only to people with genuine reasons and do not apply to willful defaulters, scammers, escapists, and non-law abiding people.
Additional Reading: Know What Happens When You Fail to Repay Your Loan
What happens when you cannot repay a loan?
Generally, when you miss out on a few EMIs, after giving you repeated notices, the lender initiates the recovery process. In the case of secured loans like home loans, two-wheeler loans, and car loans, the bank takes possession of the asset as per the Sarfaesi (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests. However, a bank cannot start the repossession procedure without giving you sufficient notice.
Rights of Loan Defaulters
Right to Adequate Notice
When your loan repayment is delayed by over 90 days, your bank account is marked as an NPA – Non-performing asset. In such cases, the lender issues a 60-day notice to the borrower. If the borrower is unable to repay the pending EMIs within the notice period, the bank is authorized to sell the assets.
Even in this situation, the bank has to issue another 30-day public notice before the assets can be auctioned off.
Right to Fair Valuation of Assets
Before the sale of the asset, banks are required to issue a public notice specifying details of the sale like – the fair market value of the asset, the reserve price, and other details of the auction like venue, date, and time.
The bank appoints valuers, who determine the sale price of the asset. If the borrower feels that the asset is undervalued, he/she can contest the auction. The defaulter can also find another buyer and introduce the buyer to the lender.
Right to the Balance of the Auction Proceeds
Once the lender sells the asset via an auction, the defaulter can claim the excess amount (if any) that is available after settling the dues. As per law, the lender can only collect the amount that is due and return the excess amount to the borrower.
Right to Humane Treatment
It’s a common practice for lenders to employ recovery agents to coerce defaulters to pay the pending amounts. However, banks have to ensure that recovery agents treat defaulters humanely. Recovery agents cannot cross the line by harassing borrowers.
Third-party recovery agents can only meet defaulters at a place and time that is convenient to the latter. Visits must be scheduled only from 7 am to 7 pm and recovery agents have to be civil and not violate norms of decency.
As a defaulter, if you feel that the recovery agent harasses you or your family members physically or mentally, you can raise the issue with your lender or banking ombudsman officers.
Additional Reading: How to change mode of repayment for a loan
What can you do when you are unable to repay a bank loan in India?
Restructure your loan
If you are unable to repay your loan due to a temporary problem like a sudden illness or loss of a job, you can approach your bank and explain the situation. Produce relevant documents that you have been paying your EMIs regularly and repaid other loans you have taken in the past. Your lender is likely to understand the situation and reschedule your loan. You can resume payment of your EMIs once your finances get back to normal.
Reduce the EMI
If your earning has dropped or if your other expenses have increased, you can approach your lender to reduce your monthly EMIs, to lower your loan burdens.
Liquidate your investments
If you are finding it difficult to repay your loan due to cash inflow problems, you can liquidate other investments. Use your savings in mutual funds, bank fixed deposits and other equities to repay your loans.
Dispose of the Asset
For instance, if you have taken a car loan but are unable to pay it, you can sell the car and switch to a less expensive model or even manage without a car for a while.
Make sure to scrutinize your Financial Situation before you apply for a Loan
Today loans are easily available. However, that doesn’t mean you should take one, just because a lender is ready to offer you one. Loans are risks, and you need to weigh the pros and cons before you take a loan. Defaulting on a loan has serious negative consequences that damage not only your financial standing but also your daily life.
Make sure to apply for low-interest loans that are easier to pay off. Above all, evaluate your financial situation carefully, and choose loans only when you are confident that you can repay it easily.