If you get a legal notice for not paying a personal loan in India, it does not mean that you will be going to jail/prison directly. Non payment of loans to the banks is a civil charge in India. Criminal charges can be filed only if there is a case of intentional defaulters, cheating, etc. Also, if you are going to pay your loan through cheques and the same gets bounced, a cheque bounce case under Section 138 of Negotiable Instruments Act, 1881 may be initiated. Only in the extreme case, the punishment for non payment of personal loan is jailing the defaulter. This is because the bank does not gain anything by sending the defaulting borrower to jail. Their main aim is to get back the money. So, they will start with settlement, arbitration, or even a civil suit.

Rights of Genuine Defaulters

Loan defaulters must contact banks and communicate the reasons for not paying the personal loan. In case of genuine defaulters, the following options will be provided.  

  • Lower EMI/Installment: If you are not able to pay your EMI due to a cash crunch, then you can request the lender to reduce the EMI. Even if there is an extension in the period of the loan, it is better than not being able to pay back the loan.
  • Deferment of EMIs: If you are not able to pay the EMI for a particular period of time, then the bank will allow you to pay your EMIs later after this specific period. Banks may allow non-payment of EMIs for a period of 3 to 6 months. After this duration is over, the EMI payment should start again. 
  • Haircut Settlement: If the amount of personal loan is not very high, then the lender may agree to do a haircut settlement. This is the splitting of the loan amount between the interest and the principal. This is a good way of avoiding non performing assets. It will also make the borrowers confident that there will be no legal action at a later date against them. 
  • The defaulter can persuade the bank to close the loan once and for all for a part-prepayment. 
  • As stated in the SARFAESI Act, banks can arrange to recover their NPAs without the need to move to a court of law.

What Happens In India When You Don’t Pay Your Personal Loan?

  • Harassment by recovery agents: Lenders may hire certain recovery agents to recover the money from the defaulters. These recovery agents may use various techniques to harass the borrowers. 
  • Arbitration: The loan agreement lays down that legal disputes should be resolved in an amicable manner through arbitration. However, this method is favorable to financial companies 
  • Debt Recovery Tribunal: This statutory body decides issues pertaining to solvency of individuals as well as other juristic persons. Debt collection and bankruptcy lawyers are hired to carry out the proceedings of the case which makes matters difficult for defaulters.
  • Civil Courts: If the amount of personal loan involved is higher, then civil charges may be initiated. A legal notice for not paying the loan is sent to the defaulter. The proceedings may include the attachment of property for intentional defaulters.  
  • Criminal Charges : if there is some fraud or cheating involved like forgery of payslip, cheques, etc. deposited with the bank, then the bank may initiate criminal proceedings against the defaulter. Blank cheques taken by the bank during loan approval for security may be used in the case of default. If bounced, criminal proceedings will ensue under Section 138 of Negotiable Instruments Act, 1881.