The best thing about a personal loan is that it helps us when we are in a financial crisis. So, as a borrower, it is only right to repay the loan as fast as possible. This will build a healthy credit score which will help you become eligible for a higher loan amount the next time you need it.
In case you can not repay the loan in the given time period, banks send recovery agents to obtain the remaining amount from you.
The Debt Recovery Tribunal in banking law facilitates speedy recovery of the loans. In this article, let us take a look at how a loan recovery process is generally conducted.
When a borrower is unable to repay a loan, the lending institution initiates a loan recovery process.
RBI guidelines for loan recovery ensure that the process is beneficial to the lender while also respecting the borrower’s legal rights and obligations.
There are two main ways of loan recovery -
One of the main criteria that determines a loan recovery process is the reason for loan default. Let us understand this with examples.
IMr. X is financially responsible and has a good credit score. But due to unexpected circumstances (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/her one of the following options -
It should be noted that if Mr. X opts for a moratorium or a ‘haircut’, his credit score may get negatively affected. Repaying the loan amount in full with an extended tenure is the best option for him.It should be noted that if Mr. X opts for a moratorium or a ‘haircut’, his credit score may get negatively affected. Repaying the loan amount in full with an extended tenure is the best option for him.
A borrower Mr. Y has a low credit score but has availed a loan even when he is unsure about his repayment capacity. Due to this, although he has received a loan, the interest rate is high and repayment term is short.
At any point in time, if he is unable to repay the loan, even if the circumstances are genuine, he may not be offered a moratorium or ‘haircut’.
If this was a secured loan and Mr. Y defaults, the lender may also choose to sell the asset given as collateral to recover the loan amount. However, Mr. Y has the right to receive any excess amount made through the sale after the loan amount has been repaid.
If neither of these options works, the lender may opt to send loan recovery agents.
Loan recovery agents are almost always looked at negatively and with fear. You may have heard of stories where agents have harassed innocent individuals in the name of loan recovery. However, these are illegal as there are elaborate guidelines put forth by the RBI when it comes to loan recovery.
Agents are legally bound by these guidelines and cannot harass borrowers in any way. Some of these guidelines are as follows -
Is defaulting on a loan a criminal case? 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 cannot be arrested.
But 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, if the borrower is deemed to be a wilful defaulter by -
Then a criminal case can be filed against the defaulter which may lead to arrest and a trial in a criminal court.
Lenders have to legally 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 SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests) Act.
However, the rights of every loan defaulter must be upheld. These are -
For more information about this, take a look at our article on legal action for defaulters.
Banks and other lenders can generally predict when a borrower is on the verge of defaulting based on their financial behavior as well as a credit score. 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 terms. If this does not work then assets may be seized in case of secured loans or loan recovery agents may be enlisted. If neither of these works, the lender may write off the loan or declare the borrower/company as a Non-Performing Asset or NPA.
Here are some helpful strategies to employ much earlier in the lending lifecycle, as well as techniques to make loan recovery effective and resourceful, to prevent loans from turning into bad debts:
If the bank or the recovery agent harasses the customer, he/she can go to the police station and file a complaint. This must be the first step before taking more drastic action. If the police do not provide any assistance or do not register the complaint, the client may proceed to civil court and seek relief.
The client can also file a complaint with the Reserve Bank of India (RBI), which can take strict measures to ensure that the loan recovery agent does not engage in illegal behavior.
In the case of a secured loan, such as a home or car loan, the lender may seize the asset used as collateral to recover the loan.
An unsecured loan provides no security to the lender and is solely based on the borrower's credit rating, so there is no imminent risk to the borrower about lenders having a claim on their assets.
As a result, no assets can be taken. In the case of a dispute, recovery is determined by the contract term and the legal process. However, the borrower’s credit score will be severely affected.
The borrower will not go to jail. Deferring on a loan is a civil charge that can lead to criminal charges. As a result, a genuine loan defaulter cannot go to prison. However, there are situations in which a criminal case may be filed against a defaulter if he/she -
Reducing the EMI: Banks can reduce EMIs by increasing the loan tenure or converting an unsecured loan to a secured loan.
EMI cancellation Payment for a limited time: In case of unforeseen circumstances, banks may permit non-payment of EMIs for a period of 3 to 6 months. After this time period, the EMI payment should resume.
The defaulter can convince the bank to close the loan once and for all for a part-prepayment.
In accordance with the SARFAESI Act, banks can recover NPAs without involving courts.
Debt recovery is the process by which a creditor engages a third party, to obtain payment for an outstanding loan that they may have defaulted on.
The major challenges a bank faces during the loan recovery process are:
Like any other unsecured loan, a bounce-back loan is subject to repayment through a variety of methods. Banks have teams dedicated to recovering debt and they will communicate with you frequently. However, if you keep missing payments, it could lead to debt collection calls, and County Court Judgement, which could lead to bailiffs seizing company property as a means of debt repayment.
Yes. However, the loan recovery agent can only visit you between 8 AM and 7 PM. RBI has also stated that these agents can not resort to any kind of harassment.
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