“Oops! I did it again. I failed to repay. Now I am lost in the game…Oh Baby, baby!”
Now that’s one song which every loan defaulter can relate to. Repaying a loan and keeping up with the EMIs can be quite an uphill task. It’s possible to tumble and fall into a spiral of debt from defaulting on your loan. This can be quite worrying and you’re probably wondering what the consequences will be. Well, while defaulting on a loan repayment is certainly something you should avoid, it is not the end of the world and won’t brand you as a criminal.
If you are worried sick about having defaulted on your loan, we have something that we hope will make you feel a little better. There are certain rights which have been established to safeguard the interest of loan defaulters. Read on to know what these are.
Let’s begin. It’s important to know that banks have a provision for restructuring the loan. There are various ways to do this depending on the type of loan you have taken. However, one common method would be extending the tenure of the loan. What happens here is that with the extension of your loan tenure, your EMIs become smaller and therefore, easier for you to manage. However, the bank must perceive the reason of default to be genuine before they do any kind of restructuring. The Reserve Bank of India (RBI) has issued guidelines for this. For example: the loan tenure can be increased by not more than 1 year in most cases. Foreclosure by selling the collateral with the borrower’s co-operation is also advised as the next step.
Does a default mean that you need to give up ownership of the asset for which the loan was taken?
Owning a house or a car is a dream come true for many because of the availability of loans. In the last few years with an increase in the standard of living particularly in the metros, the once conservative and loan averse investor is now willing take on loan commitments to satisfy even leisure requirements. However, if you find that you are in a situation where you will not be able to meet your loan obligations, what do you do?
Running away from the lender is not an option. Banks/lending institutions understand that there could be genuine reasons because of which the borrower is unable to make timely payments. For e.g. the loss of a job, or an accident that may have confined the borrower to his / her bed. Banks are more likely to consider your situation, if you have always paid your EMIs on time, before the things took an unfortunate turn. Based on how genuine your intent and case is, the bank may look for various feasible solutions that are mutually acceptable. The borrower will benefit because he will be able to retain his asset and the bank will also benefit because this agreement will prevent an addition to its non-performing asset (NPA) portfolio.
The various options that can be worked out include:
- Rescheduling your debt: After having analysed your financial position, if the bank feels that the quantum of the EMI is what is troubling you, they may be willing to reschedule your debt by extending the loan tenure. That will bring down the monthly EMI commitment, though it will mean more interest outgo in the long-term. However, you should consider the immediate relief it can bring to your current situation. When the tide turns and you are facing better times you can try negotiating with your bank and revert to your old or higher EMI or even prepay your loan. Closing your loan early can help to save excessive interest outgo as long as the bank doesn’t levy a heavy prepayment penalty.
Check This: Should you invest or prepay your loan?
- Deferring the payment: If your financial situation is such that there is likely to be a jump in cash flow going forward because of a change in job or any other reason, you may seek temporary relief from the bank for a few months. The bank may permit the same but may charge a penalty for not paying within the time frame agreed upon earlier.
- One time settlement: If you express your desire to pay back and notify the bank about your current financial condition, banks may be willing to give you the option of a one-time settlement. Please note that this will be done on a case-to-case basis. This is a good way to get rid of your loan if you have some money. Usually the settlement amount lower than the original amount you would have had to pay. i.e. the bank may waive off some amount or charges. If your financial situation is really bad, then you may need to file for bankruptcy to free yourself from the loan commitment.
- Conversion of loan in case of unsecured loans: Banks tend to be stricter as far as unsecured loans are concerned. The borrower could opt for converting the unsecured loan to a secured one by offering a security. This will bring down the rate of interest and thus the EMI burden.
Running away from the problem is not the solution. Not only will you undergo emotional stress, you will also end up losing your asset. Remember, your intent to pay off the loan should be evident to the lender. So be wise and talk to the bank representative the moment you realise that you will not be able to meet your obligations. Never wait till things get really bad.
What happens if none of the above options work out?
If none of the above options work, after giving you time to repay you dues, the bank will take the next step which is repossession of the asset (in the case of a secured loan). Here’s what will happen.
Movable asset (Car/Auto)
- The borrower will be given a notice of 7-15 days to pay the dues before the repossession of the vehicle takes place. In case of non-payment within this notice period, the bank will repossess the pledged vehicle.
- After repossession of the vehicle, a pre-sale notice will be issued to the borrower giving him seven days to pay the outstanding dues. The pre-sale notice will clearly mention the details of the concerned office and the corresponding contact person for payment and release of the vehicle.
- In case the borrower makes the payment in accordance with the agreed terms of settlement, the vehicle will be released back to the borrower within seven days from the realisation of the payment.
- If the borrower does not manage to make the payment, it will be sold through an auction through dealers empanelled with the bank within 90 days from the date of repossession.
Immovable Asset (House/property/land)
- A notice will be sent to the borrower u/s 13(2) of the SARFAESI Act. This can be done only after the loan is classified as an NPA as per the guidelines set by the RBI.
- The customer will be allowed 60 days, post issuance of the notice, to regularise the account or come forward to settle the account.
- If the borrower refuses to pay, then the authorised officer will ask for the physical possession of the mortgaged property by handing over the demand possession notice to the borrower.
- The bank shall proceed with the auction of the attached property after 30 days of taking possession of the property. This is in the event, that the customer does not come forward and settle the loan. The bank shall send the customer a letter intimating him about the venue of the sale, indicating date and time of the same.
- The bank will consider handing over the possession of the property to the borrower any time after repossession and before concluding the sale transaction of the property, provided the bank dues are cleared in full.
Any excess amount obtained, after adjusting the dues on the loan, will be refunded to the borrower.
Additional Read: Home Loan default – How to handle one
The Rights of the Borrower
The SARFAESI act gives the customer the right to appeal against the action of repossession taken by the bank in the Debt Recovery Tribunal u/s 17 within 45 days from the date when the action was taken. If the DRT passes an order against the borrower, then an appeal can be filed before the Appellate Tribunal within 30 days of receiving it. If it is held in appeal that the possession of the asset taken by the secured creditor was wrongful, the Tribunal or the Appellate Tribunal may direct its return to the borrower, along with appropriate compensation and cost.
You can exercise the following rights if you default on a loan:
Right to Notice
When you fail to pay the loan dues, the bank can’t take any immediate action against you. If you haven’t paid EMIs for 90 days, the bank must serve you a notice of 60 days. Once the notice period is over and if the dues are still unsettled, then the bank is allowed to repossess your property. And before the bank can sell off your property, it has to serve yet another notice of one month informing you about the same.
Right to be Heard
Within the one month notice period, before the property is auctioned, a loan defaulter can file a representation to the authorities and raise objections towards selling off the property. The loan officer has to then respond to the representation and give valid reasons for turning down your objections within seven days.
Right to Fair Value
If the bank has repossessed your property due to a loan default, it does not give them the sole right to decide the sale price of the property. Along with the one month notice informing the customer about the auction of the property, the bank has to send a fair value notice that clearly states the sale price of the property as assessed by the bank officials. However, if you feel that the bank is selling it off at an under-priced rate, then you can raise objections and declare a price that you feel is reasonable. The bank has to consider your plea to receive fair value for your property and will have to revaluate the property once again.
Right to Balance
Since the rates of property are steeply rising with each passing day, there is a possibility that there might be a fair amount of balance left after the bank has settled the loan by selling off your property. You are entitled to get that balance amount as the bank has no claim on it once the loan is settled.
Right to be Treated Politely
Banks are registered organisations and can’t act like independent money lenders when it comes to a loan default. In the past there have been reports of harassment and mistreatment of loan defaulters by collection agents but now banks have decided to follow a code of conduct that is polite and respectful. A collection officer has to politely request to meet you and the place and time of the meeting can be as per your convenience. If you don’t respond to the request, the collection officer may meet you at your home or work place. Also, the agent can meet you only between 7 AM and 7 PM and can’t harass you late at night or in the wee hours of morning. The collection agents are supposed to treat the defaulters in a respectful manner without resorting to abusive language and mistreatment.
Loan default can have serious consequences. Not only could it result in the seizure and auction of your assets, but your Credit Score too, will go for a toss. Even rescheduling debt tarnishes your credit history to an extent and will reflect in your credit report. Obtaining a loan in the future will become an issue which is a huge financial setback. Make sure you take a loan only if you’re sure you will be able to make timely repayments. A good way to do this is to ascertain your personal net worth in terms of assets you own and the money you have at your disposal after taking stock of your existing debts and other financial commitments.