Taking loans can be helpful in many situations. A loan can help you tide over a financial crisis in quick business loans. It can help you take care of medical emergencies or help you buy that long-coveted house or vehicle.
As lucrative and useful as loans may be, they are debts incurred to the institution loaning the money at the end of the day. It is imperative to read and understand the terms, conditions, interests, and other details regarding the loan before entering a contractual bond with a bank or NBFC.
More importantly, one must ensure the regular and timely repayment of the loan according to the contract terms.
However, circumstances can be unpredictable as far as financial scenarios are concerned and prevent you from paying back your debts.
In such a situation, the debt burden can become a serious issue as the financial institution that invested in your loan starts to look at legal recourses to recover the money owed to them.
Even so, as a borrower who failed to pay back his debts in time, you have certain legal rights yourself. It is vital to be aware of and exercise these rights as a defaulter when the bank comes knocking at your door. This article will make you aware of these rights in detail and what happens when a borrower is unable to repay a loan.
What can the banks or other financial institutions do when someone fails to make proper and timely payments?
Even if someone withholds the bank’s money from it for an inappropriate amount of time, intentionally or unintentionally, the bank just cannot barge in and take over that person’s life.
There are certain clear guidelines and legal procedures outlined for the banks by the Reserve Bank of India and the Indian judiciary, which they must follow to recover the money owed to them.
If the loan is a secured loan where a certain asset or assets like real estate, cars, gold, or others have been pledged to the bank, then the bank can recover its money by laying claim on those and only those assets which are contractually promised to the bank.
If the loan is of an unsecured variety, like a personal loan, then the bank must go through additional steps to compensate for the loss of their money.
They need to wait for a period before declaring the customer’s account as a non-performing asset or NPA and giving them a chance to settle their dues before moving on to court.
What are the specific rights you have as a customer who has failed to clear their loan debts to the bank?
Right to proper and sufficient notice:
In most cases, the borrowers do not intentionally hold back the money, and it is a case of unfortunate circumstances. These cases are not criminal offenses and merely civil issues unless the borrower withholds the money with fraudulent or malicious intent.
The borrowers can go 90 days without making payments before their accounts are deemed NPA. Even after that, the bank must give a notice of 60 days before starting legal procedures.
This time is granted as a right to the borrowers under the SARFAESI Act to make amendments and pay back the money they owe in that period, if possible.
Right to privacy:
There can be instances where banks employ third parties as recovery agents to retrieve their money.
These recovery agents cannot legally invade the private spaces of the borrower unannounced. They have no right to threaten or coerce the borrower using criminal methods. To meet the defaulter, they must take appointments prior to the meeting.
Right to balance proceeds:
In the case of secured loans, the bank is entitled to using the asset or multiple assets pledged as security to the bank in case of loan defaulting.
Usually, the bank auctions off the properties and uses the money received to recover the loan. However, if the asset’s selling price is more than the amount owed to the bank, then the borrower holds the right to possession of the excess balance.
For example, say that a man takes a secured loan of 15 lakh INR against his house. Once defaulted, the bank takes possession of said house and auctions it off for a sum total of 25 lakh INR.
Now, if the man owes the bank 20 lakh INR combining the principal and interest, then the man has the right to the excess 5 lakh INR that remains from the auctioning of the house.
Right to a proper evaluation of properties:
Keeping the above example in mind, the banks may try to evaluate the man’s house at 20 lakh INR on paper so that the borrower cannot lay claim to the excess balance. This way, a bank may try to reap unfair profits.
So in case, the value of the property exceeds the actual amount that is owed, it would not be in the borrower’s best interest if the bank evaluates his properties on its own.
The RBI has outlined clear guidelines in the SARFAESI Act to ensure such discrepancies do not affect borrowers. The borrowers have the right to a fair evaluation.
Some certified valuers determine the value and scopes of a property before the banks can put them up for auction. These values are impartial and follow set guidelines for this evaluation process to ensure the borrowers don’t get cheated.
There are dedicated panels of valuers employed by the banks for this specific purpose. Borrowers can also get opinions from third parties.
Right to be heard:
If the borrower has any grievances regarding the bank’s workings or processes, then he has the right to voice these objections. These objections may be regarding violation of terms of the contract, criminal approaches, threats, lack of notice, and any other such things.
A designated officer is bound by law to reply to the borrower and address these issues, if any, within 7 working days.
Right to humane treatment:
Though defaulting is an unethical practice, the banks do not have the right to treat the borrower however they please because they missed payment deadlines. As public enterprises, banks, NBFCs, and other financial institutions very much fall under the purview of the land law.
When contacting the defaulter for discussions regarding the defaulting, the recovery agent or agents employed by the bank must maintain a polite demeanor.
There has to be prior communication and consensus between the two concerned parties regarding the time and place of the meeting. The permitted time for the meeting is legally restricted for the agent from 7 AM to 7 PM.
The recovery agent cannot threaten, harass, abuse, or humiliate the borrowers or their family members.
Ways to prevent legal procedures against you in case of loan defaulting:
- Make sure to utilize the 60 days notice period given by the bank to approach them. Sometimes a sincere and proactive communication can be enough to delay legal actions.
- Try to reach an adjustment with the bank, like increasing tenure and reducing EMI to ensure easier financial management.
- A settlement can be established with the bank where you are pardoned a portion of the total debt in exchange for a severe penalty against your credit score.
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While it is advisable to always pay your dues on time to prevent any adverse reaction from the bank, sometimes unavoidable circumstances occur. It is always prudent to know your rights and the most efficient ways to exercise them in such a situation