What happens if personal loan is not paid? Is there a punishment for non payment of personal loan? Will the defaulter go to jail straight away?
There will be hooliganism displayed at the defaulters front door by the Banks? What are the bank loan recovery rules?
A person who is under stress due to non-repayment of loan, face nightmares answering these question. Defaulting on loan payments triggers fear. No doubt.
But it must also be remembered that there are rights of a loan defaulter as well. Banks (lenders) cannot start arm-twisting the defaulter.
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But why to protect a loan defaulter? Because there may be genuine problems due to which one is defaulting on loan. In the court of law, genuine reasons are given due weightage.
It is true that personal loan default consequence are bad. Banks (lenders) will not allow their money to let-go easily. A due course of action will take place. It cannot be avoided.
But if one is unable to pay personal loan EMI (say), this does not make him/her a criminal.
Moreover, in legal terms as well, defaulting on loan is a “civil dispute”. Criminal charges cannot be put on a person for loan default. It means, police cannot make arrests.
Hence, a genuine person, unable to payback the EMI’s, must not become hopeless.
There are rules which will help the defaulter to negotiate with his/her lender.
Specially in case of personal loan, bank has no collateral. Hence personal loans are called as non-secured loans. In case of personal loan default, banks has very few options. The best bet for banks is to sit on a negotiation table and settle the litigation.
But it must be remembered that these rules are made for those people who, due to genuine problems, are not able to pay their due EMI.
These rules are not for careless, escapists, wilful defaulters, and non-law abiding people.
What a genuine person must know about the consequences of loan default?
Lets start with caution first…
I am not referring here high net-worth individuals (or farmers) who took business loans and are defaulting.
I am talking about middle class people. Yes, it is here as well that people have started defaulting on loan. Who are these people?
- Careless people: Who took excess loan.
- Genuine people: Who are facing genuine problems.
- Over-smart people: Who try to game the banks.
Earning power of middle class in India has increased. This has given rise to more people resorting to loans.
But this has also given rise to careless and over-smart people.
Careless people: Did not analyse their payback power before taking loan, hence they default.
Over-smart people: They think that they can mislead the bank by giving fake-reasons of non-payment.
Genuine people: They are people who paid all past EMI’s on schedule. But due to a genuine issue, are not able to pay-back the loan.
All loan defaulters must first realise that, “loan payment default is not an acceptable practice“.
Loan default is neither good for the person, nor for the economy, nor for the business. Hence, banks almost hates loan defaulters.
So if one is defaulting on loan, he/she shall not accept a very polite handling of the issue. But this is only one side of the matter.
People who are stuck due to genuine problems, must also remember that “even the loan defaulters has their own rights“.
Banks cannot simply send recovery agent at their doors to shake them up and show disrespect.
In this article we will see what are the rights of loan defaulters.
I will approach this article in two ways:
- #1: What Banks can do for genuine loan defaulter?
- #2: What are RBI’s guidelines for escapists?
There are RBI’s rules, which all banks must adhere to in handling cases of loan default.
This is specially true for handling cases dealing with common men defaulting in small loan like credit card debt, personal loan, home loans etc.
So lets start with, how banks shall handle a genuine case of loan default.
#1. What Banks can do for genuine loan defaulters?
There are rules, and bank’s would do everything within those rules to assist the loan defaulter.
But why banks will help a defaulter?
Because it is also in their interest to not allow a loan to convert into an NPA.
So what a defaulters should do is to approach the bank proactively and explain them the problem.
As per banking rules, these are the few ways in which banks can help a loan defaulter:
- Lower the EMI.
- Allow EMI free period.
- Accept a lump-sum amount to close loan.
These are best that a bank can do in favour of a loan defaulter. But if none of the above solutions work, then the loan will become an NPA.
In this case the bank will follow the rules specified as per SARFAESI Act.
#1.1 LOWER THE EMI:
Banks can lower the EMI in two ways:
- By increasing the loan tenure.
- Converting non-secured loan to a secured loan.
In banking terms it is called as loan rescheduling of restructuring.
This is the first help that banks can render to the loan defaulter.
Lowering of EMI’s due to tenure extension may help few defaulters, but in most cases this help doesn’t prove enough. Why?
Because as per bank rules, loan tenure cannot be increased a lot. As a result of limited tenure extension, the net effect on EMI reduction is very nominal.
But in case of non-secured loan (like personal loan) being converted into a secured loan, reduction in EMI is appreciable.
It is also in favour of bank to convert a bad, non-secured loan into a secured loan. Why? Because recovery of secured loans in case of default is more straightforward.
#1.2 ALLOW EMI FREE PERIOD
This help can be provided in typical cases where the flow of income has been temporarily disturbed due to unforeseen reasons. Example:
- Loss of job.
- Temporary stoppage in business operation.
Here the banks may agree to waif-off the EMI collection for a certain period of time (say 3-6 months).
After the lapse of this period, the EMI payment must start.
This relaxation period shall be used by the loan defaulter to get a new job, or bring the business back into track.
#1.3 ACCEPT A LUMP-SUM AMOUNT & CLOSE THE LOAN
There can be a case, where the loan defaulter is in no condition to repay back the loan balance (today or in future).
But he is offering to pay a part of the loan. In return for this part-payment, the defaulter is asking the bank to close the loan once and for all.
Why a bank should agree for such an offer? Because it is better to get something than nothing. If the loan defaulter will be successful in declaring self as bankrupt, then probably the banks might get nothing back.
But for sure, banks will not agree for peanuts. The loan defaulter and bank will have to fight a hard bargain.
Here the onus is on the loan defaulter to convince the bank that, he can give only so-much for the loan closure.
#1.4 FOLLOW SARFAESI ACT
Bank’s will resort to this step only when a loan has been deemed as an NPA. It means, the above three steps has failed.
What is SARFAESI Act? The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
As per SARFAESI Act, banks etc can arrange for recovery of their NPA’s without the need to move to the Court of Law.
What banks can do as per SARFAESI Act?
- Send a legal notice to the defaulter.
- Listing of Asset for sale (auction).
- Issue a public notice regarding sale of asset.
- Sell the asset at a fair price.
Once the asset is sold, the amount so collected will be used for loan & other cost recovery.
In case the asset sold price was higher than the recovery amount, the differential amount will be returned back to the loan defauler.
What we have seen now, was what best banks can do for the “genuine” loan defaulters.
But the treatment is not the same for other people. Who are other people?
Loan defaulters who have missed their EMI’s, and are avoiding the bank.
Handling of such people are slightly tougher than “genuine” loan defaulters.
In these cases, Bank use the recovery agents to bring the loan defaulter to the negotiation table.
But there are few guidelines of RBI regarding the role of recovery agents.
#2. RBI’s Guidelines for Escapists…
RBI is the boss of all banks. Hence banks must follow the rules set by the RBI.
Some years back there were frequent news printed about the recovery agents. Today we visualise recovery agents more as gangsters than as bank associate.
In one of the publications of Reserve Bank of India (RBI) it was mentioned that:
“…engagement of recovery agents is causing serious reputation risk for the banking sector as a whole…”.
Taking a corrective action, RBI revised the guidelines for engaging recovery agent by banks.
There is a clear cut guidelines from RBI that, banks/recovery agents cannot use ‘uncivilised, unlawful and questionable behaviour’ in the process of loan recovery.
What are the guidelines?
- Hiring of professional recovery agents.
- First send notices, then recovery agents.
- Hear the case of the loan defaulter.
- Recovery agents are Bank’s responsibility.
#2.1 HIRING OF PROFESSIONAL RECOVERY AGENTS
Banks must hire recovery agents with care. RBI has asked banks to conduct due diligence on the agency before hiring them as a recovery agent.
Due diligence shall be conducted by banks themselves. Due diligence shall not only look at the company as a whole, but must also look at people who are involved in the recovery process.
The person hired as recovery agents shall pass through police verification. The family background of person in consideration shall also be checked by the agency before hiring.
So it means that if a rowdy (in name of recovery agent) brushes his shoulders with the defaulter, a police complaint can be lodged in the police station.
In this case the bank/recovery agency must give clarification on the behaviour of agent with the defaulter. Unsatisfactory reply may result in loss of contract of the recovery agency obtained from the bank.
Unlawful conduct of the recovery agents with the defaulter is a criminal offence.
#2.2 FIRST SERVE NOTICE TO THE LOAN DEFAULTER
Recovery agency cannot simply come knocking on doors of the defaulter.
Before bank sends a recovery agent, they must issue intimations. In the intimation letter they must first authorise a recovery agency to act on their behalf.
Communication of authorisation shall go to the loan defaulter directly from the bank. So it means that any xyz cannot knock on the door of the defaulter acting as recovery agent.
If somebody does the opposite, the load defaulter can refuse to entertain the agents. It may also happen that the recovery agent self carries the authorisation letter. But this can be done only when several attempts to deliver the letter has failed in the past.
Recovery agents shall approach the loan defaulter only after showing the authorisation letter and identity card. In case the agents misbehave, the details of identity card can be used to lodge a police complaint.
For helping the cross-verification of the credentials of the recovery agent, concerned bank must publish the details of recovery agency on their website.
#1.3 HEAR THE CASE OF THE LOAN DEFAULTER.
Banks must hear the defaulters side of story without a bias. While issuing the details of recovery agent by the bank, they must also issue one more communication.
This communication should furnish details of ‘how and to whom’ the loan defaulter can contact in the bank, explaining his grievances.
This step looks simple, but it will work as a big help when a recovery agent knocks on defaulters door steps. Then the loan defaulter can show a copy of discussion he/she already had with the bank.
If the defaulter has already explained his grievances directly to the bank, then recovery agent has no further role to play.
#1.4 RECOVERY AGENTS ARE BANK’S RESPONSIBILITY
Frankly speaking, it is banks job to undertake loan recovery process in case of default. But RBI has allowed banks to offload the recovery process to a third party.
But there are risks when a banking activity is offloaded to a third party. In order to manage the risks, RBI asked banks to provide training to new recovery agents.
All recovery agent shall first get a certification, and only then they can act as recovery agents.
The training session must explain the “code of conduct & protocol” that recovery agents should practice while dealing with the loan defaulters.
One must appreciate the fact that, Banks/Government cannot be lenient towards the loan defaulters.
If they are lenient in one case, then it will be taken as precedence. People will start taking loan default as an excusable crime.
It is also possible that, people with wrong intentions shall start to FAKE their loan payment capability.
Hence it is important to maintain a tight rules for the loan defaulters.
But what happens when the case is genuine, and the concerned person is really facing a problem?
Sorry, but even in this case not much can be done. The last step is, banks taking possession of the asset.
But before taking this final step banks shall fully negotiate with the loan defaulter (see Steps #1.1 to #1.3).
It is essential for a borrower to understand that availing loan is a very serious step in ones life. One must think 100 times before getting into debt. All pros and cons must be studies by the borrow before taking even a penny of loan.
Taking loan is a risk. If loan is small, risk is less. If loan is big, risk is more.
The point is, a borrower must deliberate the consequences of loan defaulting before getting into the loan.
This small brainstorming will clear a lot of cloud about its consequences, and its related fears.
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