Personal loans provide support in times of financial need, but it is important for borrowers to repay them on time to maintain a good credit score, which also helps them secure future loans on better terms.
If a borrower struggles to make payments, financial institutions registered with the Reserve Bank of India (RBI), i.e., banks, non-banking financial companies (NBFCs), and other entities, may initiate a loan recovery process, sometimes involving recovery agents.
This article outlines the general loan recovery process, protections for borrowers, and steps to take if they experience any issues with recovery practices.
If a borrower is unable to make loan payments, financial institutions have various ways to attempt recovery. The approaches are designed to help recover the loaned amount fairly while respecting the borrower’s rights. These methods include:
Non-Judicial Route: This involves direct communication, possible negotiation, or asset recovery if the loan is secured.
Judicial Processes: Legal proceedings may be pursued to recover the debt through courts or tribunals.
The approach to loan recovery can vary depending on why the loan is in default. Here are two scenarios to illustrate common practices:
If a borrower with a solid repayment history is unable to make payments due to unforeseen circumstances, such as job loss, the financial institution may offer options like:
Extended Repayment Terms: Adjusting the loan term to lower monthly payments.
Moratorium: Temporarily suspending payments.
Partial Debt Waiver (‘Haircut’): Waiving a portion of the loan if repayment is unlikely soon.
These options can help ease the financial burden but may impact the borrower’s credit score.
If a borrower with a history of inconsistent payments defaults, the options may be limited. For secured loans, the institution may repossess the collateral to recover the debt. In such cases, the borrower is entitled to receive any remaining amount if the asset sale generates more than the outstanding loan. If neither repayment nor asset recovery works, the financial institution may turn to recovery agents.
Loan recovery agents are representatives who attempt to recover overdue loans. To ensure fair practices, they must adhere to professional and ethical standards. Key points include:
Borrower Notification: Borrowers must be informed in advance if recovery agents are involved.
Agent Identification: Recovery agents must carry an authorization letter, a notice from the financial institution, and an ID card during interactions with borrowers.
Limited Contact Hours: Agents are restricted to contact hours between 8:00 a.m. and 7:00 p.m.
Respectful Conduct: Agents must avoid any form of intimidation, harassment, or invasion of privacy.
Complaint Resolution: Any complaints by borrowers regarding the recovery process should be addressed promptly by the financial institution.
If a recovery agent acts improperly or harasses a borrower, reach out to the financial institution to report the issue formally to lodge a complaint.
For large outstanding amounts, financial institutions may turn to Debt Recovery Tribunals (DRTs). These tribunals streamline the recovery process, allowing institutions to reclaim loaned amounts efficiently. In cases where a secured loan is classified as a non-performing asset (NPA), DRTs play a critical role in ensuring fair resolution. However, DRTs generally handle claims of ₹20 Lakh or more.
Loan default does not usually lead to criminal charges. However, financial institutions may pursue civil cases to recover debts if borrowers fail to meet obligations. In cases where a borrower is considered a willful defaulter—meaning they have intentionally avoided repayment or misused the loan funds—more serious legal actions may be pursued.
Borrowers have specific rights throughout the loan recovery process to ensure they are treated fairly. These rights include:
Right to Notice: Borrowers must be notified before recovery actions are taken.
Right to Fair Value: Fair treatment in the valuation and sale of collateral.
Right to be Heard: Borrowers should have the chance to discuss or negotiate repayment terms.
Right to Claim Balance: Any extra amount from asset sales must be returned to the borrower.
Right to Respectful Treatment: Borrowers should be treated with professionalism and courtesy.
The recovery of bank loans is regulated by laws that intend to protect both the lender’s rights to recover the money and the borrower’s rights to be free from harassment. These laws are based on the principles given below:
The RBI requires banks to comply with fair practices. Banks are expected to respect a borrower’s dignity. Aggressive tactics like threatening violence and illegal seizure of property are strictly prohibited.
Lenders, including banks and NBFCs, are required to keep borrowers updated on their outstanding amounts and the recovery process.
All borrowers have the right to a fair hearing and the chance to share their perspective or negotiate a revised repayment plan before any drastic actions are taken.
Loan repayment can sometimes be challenging for borrowers facing financial difficulties. Here are some strategies borrowers can adopt to manage debt and avoid default:
Communicate openly with your lender regarding your situation. Maintain open and honest communication with your lender throughout the loan recovery process.
Seek help from credit counseling, financial advisors, or legal professionals if you struggle with repayments. These professionals can offer guidance and even negotiate with lenders for you.
Know your legal rights and loan terms, and get legal advice if needed. If you feel your rights have been violated or if your lender is taking legal action against you it’s good idea to seek legal assistance.
A non-performing asset (NPA) is a loan where the principal and the interest have not been paid for the past 90 days. The government has implemented several recovery strategies to address NPAs:
Prohibiting banks from granting additional facilities to willful defaulters.
Expanding the authority of Debt Recovery Tribunals (DRTs) to prioritize high-value cases.
Changing the dynamic between borrowers and lenders through the Insolvency and Bankruptcy Code (IBC).
Injecting capital into Public Sector Banks (PSBs) to improve their coverage ratio.
The loan recovery process is intended to help financial institutions manage defaults while respecting borrower rights. Depending on the borrower’s situation, options like extended terms or moratoriums may be offered. If repayment remains challenging, institutions may consider asset recovery or involve recovery agents. For unresolved debts, institutions may write off the loan or declare the borrower an NPA.
For any questions or if you’re facing difficulties with loan recovery agents, contact your financial institution directly for assistance.
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, they 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.
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 -
Does not repay despite being able to
Diverts the loan or funds for reasons other than those provided while availing of the loan
Disposals or transfers of collateral without the lender’s knowledge
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