Ways of Loan Recovery

Availing a loan is an act of responsibility as it involves repaying the same on time with the interest rate that is imposed. However, while most are able to clear their loan payments, there are situations that prevent borrowers from doing so. In such cases, the lending institution initiates a loan recovery process. NBFC or bank loan recovery process can vary from one institution to another and involves steps and actions that ultimately help the lender receive the payment. Despite some of the incidents that have been gaining a lot of attention these days, every borrower is entitled to certain rights that the lender has to adhere to. Additionally, RBI guidelines for loan recovery ensure that the process is advantageous to the lender while also respecting the borrower’s legal rights and obligations.

Banks and other lenders can, to a large extent, predict when a borrower is on the verge of defaulting based on their financial behavior as well as a credit score (which is an important factor considered by lenders prior to disbursing a loan). There are a number of steps followed by these lending institutions that seek to encourage the borrower to repay the said loan, such as increasing the repayment tenure or in some cases even reducing the rate of interest.

There are two main ways of loan recovery -

  • Through a non-judicial route
  • Through judicial processes

Process of Loan Recovery

As mentioned previously, the process of loan recovery can vary from one institution to another. One of the main criteria that determines this process is the reason for loan default. Imagine a situation where a borrower, Mr. A has been responsible with his finances and has a good credit score as well. But due to unexpected circumstances (for eg. the COVID-19 pandemic), he has lost his job and is unable to repay the loan. In this situation, the lending institution may offer him one of the following options -

  • Extension of repayment tenure reduces the EMI amount that he will have to pay every month
  • A moratorium wherein he will not have to pay the EMI for a few months after which his financial situation may recover
  • Accept a ‘haircut’ wherein the lender waives a certain amount of loan if the borrower is in no position to repay the loan in the near future as well

It is to be noted that opting for a moratorium or even a ‘haircut’ may have a detrimental effect on Mr. A’s credit score. Repaying the loan amount in full even if the tenure is extended is the best possible option.

Another situation is where the borrowers have been careless regarding their finances and availed a loan that is much higher than their repayment capacity. Availing of a loan should never be an impulsive process unless in cases of financial or medical emergencies. Generally, if an individual has indulged in irresponsible financial behavior, their credit score will reflect the same and this will prevent them from availing a loan easily. While there are banks that provide loans to those with lower credit scores, the terms and conditions imposed may not be to the borrower’s favor such as high-interest rates or short repayment tenures.

Additionally, the lending institution may also choose to sell the assets that have been given as security to recover the loan amount. This does not always guarantee the recovery of the entire loan amount and the borrower has the right to receive excess any amount made through the sale after the loan amount has been repaid.

However, if neither of these options works, the lending institution may opt to send loan recovery agents. Contrary to what most may believe, loan recovery agents are legally bound by certain guidelines that prevent the harassment of borrowers in any way. Let us take a look at some of these guidelines.

RBI Guidelines for Loan Recovery Agents

  • Banks must have a due diligence process in place when it comes to engaging loan recovery agents. Addressing the risks and complaints associated with them is the bank’s responsibility
  • Borrowers who have defaulted must be notified first regarding the details of the recovery agency and the agent must also carry the authorization letter and copy of the bank’s notice when meeting the defaulter
  • In case a complaint has been lodged by the borrower, banks are not allowed to forward the respective case to a recovery agency until the said complaint has been solved/disposed of. Essentially, the loan defaulter’s case must be understood and heard without a bias prior to engaging a loan recovery agent. However, this is nullified if the bank is convinced with appropriate proof that the complaints are frivolous and recovery proceedings can be continued
  • The bank must also ensure that borrowers’ grievances regarding the recovery process, if any, are addressed appropriately

Loan Recovery Through Judicial Process

Is defaulting on a loan a criminal case? Can loan defaulters be arrested? Will loan defaulters have to go to jail?

The answer to this is generally no, except in certain circumstances. Loan defaulting by itself is not a crime and defaulters can therefore not be arrested. However, if a defaulter has not repaid a loan despite being liable for the same, the lender can file a case in civil court against the borrower.

However, in certain circumstances, if the borrower is deemed to be a wilful defaulter by either not paying despite being able to or diverting the loan or funds for reasons other than that provided while availing the loan or even disposal or transfer of collateral without the lender’s knowledge, this can lead to a criminal case against the defaulter. Such situations may lead to the arrest of the borrower and trial in a criminal court.

Borrower’s Rights

Lenders are bound by law to follow certain processes if they wish to initiate a loan recovery process against the borrower. In case collateral has been provided, the asset(s) can be repossessed by the lender under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act. However, there are certain guidelines that have to be followed and the rights of every loan defaulter must be upheld. These are:

  • Right to Notice
  • Right to Fair Value
  • Right to be Heard
  • Right to Claim the Balance
  • Right to be Treated Politely

For more information about these rights, take a look at our article on legal action for defaulters

In Conclusion

The loan recovery process in India is designed to not just help lenders receive the repayment amount but also protect certain rights of the borrower. The process followed by each lender will vary but generally, it involves trying to change certain conditions to help the borrower repay the loan such as increasing repayment term. If this does not work then assets may be seized in case of secured loans or loan recovery agents may be enlisted for the same as well. If neither of these works, the lender may write off the loan or declare the borrower/company as a Non-Performing Asset or NPA.

Did you know that an account is considered to be an NPA if the interest or installment has not been paid for over 90 days? Being categorized as an NPA is harmful to one’s financial future as it prevents him/her from borrowing credit or availing loan again in the future. Additionally, the borrower’s credit score will also be severely affected. Therefore, it is essential to repay all loans on time and in full. If one is unable to do so due to certain situations, talking to the lending institution is advised as a solution could emerge from the same.

Frequently Asked Questions (FAQs)

  1. Can lenders expect the recovery of loan from guarantor if the principal borrower is unable to repay the same?
    According to the regulations put forth by the RBI, ‘the liability of a guarantor is co-extensive with the liability of the principal debtor’. In other words, a guarantor is also liable for the loan repayment, and the lender can expect or take action to recover the loan amount from the guarantor as well unless stated otherwise in the loan agreement. If the guarantor refuses to comply with the same despite having the finances to pay, he/she will be treated as a wilful defaulter.

  2. What is the process involved in the recovery of a loan after the death of the principal borrower?
    In case of the unfortunate demise of the principal borrower, the loan agreement is generally transferred to the legal heirs or the co-applicant. Certain lenders also offer insurance policies against the same and can be explored by borrowers.