Compared to the past few decades, access to credit in India has improved considerably, through RBI regulated entities such as banks and non-banking financial institutions. In recent years, there has also been proliferation of app-based lending platforms that operate outside the ambit of RBI. While timely availability of loans has many a positives such as ameliorating financially stressful situations, improving quality of life, helping grow businesses, human resources and economies, loans are liabilities that must be repaid along with the interest, in a timely manner as per agreement with the lending institution. Otherwise, non-payment by the borrower for a continuous period as specified by the law, affects the relationship between the borrower and lender and is detrimental to both, the borrower (as it can damage the credit score as well as future access to loans) and the lender (as it adds to the non-performing assets in its book of accounts, indicating some laxity in recovering loan).
Loan default is not a usual behaviour and bad loans accumulated over years are proven to affect the financial health of not only banks but the economy at large. However, it is quite possible, particularly in case of borrowers that loan default is a genuine case of inability to pay due to a variety of reasons. In such situations, the borrower must know that s/he is protected under the law and can exercise several rights. This article focuses mainly on rights of the borrower of unsecured loans such as personal loans and credit card loans that are sanctioned based on one’s repayment ability.
The Right to Ample Notice from the Lender
When a loan is overdue, the lending institution cannot take immediate action against the borrower. If EMI hasn’t been paid for 90 days, the lender must serve a notice of 60 days to the borrower, as per RBI guidelines, to pay off the debt. If the due is still unsettled after lapse of the notice period, the lender initiates other processes. With regard to personal loans, ideally, even after 180 days of non-payment of personal loan, when the lender decides to present borrower’s post-dated cheques to the bank on a particular date, this must be communicated to the borrower in advance.
The Right to Approach the Lender
When you assess your stressed financial situation leading to an inability to pay the loan amount or have received a preliminary notice after missing a single repayment, mentioning the overdue with interest and penalty, it is in your right to approach the lender for e.g the bank to inform, convince and seek its help in re-working the terms of payment that gives you breathing space. As a borrower, you and your bank could look into settling the matter through the most appropriate option from amongst the following, as provided for, by the RBI guidelines.
Restructure your loan. This involves tweaking the EMI amount and the tenor. A longer tenor will reduce the EMI amount and save one from compromising on essential financial goals.
Explore deferring the payment whereby the lender holds off the payment for some time, you are not charged any interest and use this period to arrange for the outstanding loan. After this grace period, EMIs have to be paid as per original schedule.
Explore the option of EMI free period that could range from 3-6 months depending on lender’s discretion. One’s credit score, past repayment history are important determinants before granting this to a loan borrower.
Accepting a haircut i.e agreement by both parties for closing the loan with part-payment to the bank and˝
With regard to secured loans, an additional option is available, outside the purview of court of law. In case none of the above options work, and you have exhausted sufficient time to repay dues, you can choose to cooperate with the lender who’d take over your securities held as mortgage against the loan or recover the outstanding amount as per Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.˝
It is essential to remember here, that your approach as a defaulting customer and how soon you address the issue with the lender, instead of avoiding or ignoring the notifications, calls and notices will largely decide future proceedings, including legal.
The Right to be Treated Politely
Banks and FIs are registered entities that cannot harass or mistreat the loan borrowers. The RBI has issued guidelines to the banks pertaining to engagement of recovery agents (Ref circular DBOD.No.Leg.BC.75/09.07.005/2007-08 dated April 24, 2008). RBI has also issued guidelines (Circular DBOD.NO.BP. 40/ 21.04.158/ 2006-07 dated November 3, 2006 for banks to develop framework for managing risks and code of conduct in outsourcing financial services whereby banks are advised to ensure that recovery agents are well trained to handle customers with care and sensitivity and not harass, threat or use muscle power. Section 5.7 of the circular is particularly important which a defaulting customer must be aware of. Recovery agents are required to adhere to instructions on Fair Practices Code for Lenders (Circular DBOD. Leg. No. BC.104 /09.07.007 /2002-03 dated 5th May 2003). The banks should, at the minimum adopt Indian Bank Association’s code for collection of dues and repossession of security.
The following is to be noted:
Before the bank sends you a recovery agent, it must send you an intimation letter, authorizing the recovery agency to act on its behalf. When it is not followed, the person can refuse to hear the agent.
A collection officer has to politely request to meet you at a time and place convenient to you. It is in your right to ask for identity card which would either be issued by the bank or the recovery agency. The agent cannot refuse to show his identity.
A recovery agent cannot violate your privacy by discussing your loan with others or use abusive language or contact you at odd hour i.e early morning or late night. In case he indulges in such behaviour that make you feel harassed, you must first inform the bank branch and in absence of any relief, you have all the right to lodge a police complaint along with copy of his identity card or identity number and name of issuing authority. If police refuses to file a case, the magistrate can be approached for the same. A civil injunction suit in the civil court is another route that could provide interim relief from officials and agents visiting your home for loan recovery. Recovery agents are bank’s responsibility. You could therefore complain to the bank for grievance redressal. In case of no reply from bank within one month of receiving the complaint or rejection of the complaint or non-satisfaction with the reply, one could file a complaint before Banking Ombudsman. Banking Ombudsman is a senior official appointed by the RBI to redress customer complaints against deficiency in banking services specified under Clause 8 of Banking Ombudsman Scheme 2006 (amended up to 2017). Offices of the Banking Ombudsmen are usually located in state capitals.
Few additional points to remember:
‘Genuine reason’ for loan default when proven, is given due weightage in the court of law. Loan default is a civil dispute and neither can criminal charges be put on a person nor can s/he be arrested An awareness of your rights as a borrower and genuine loan borrower will empower you to choose the right track for course correction and get out of debt situations instead of feeling stressed and imagining the worst. The bottom line for customers while taking loan is to strictly follow the repayment schedule, have an emergency fund to help you clear payment backlog, be proactive in communicating with the bank and work out a repayment plan that works for you and will enable you to sidestep the status of loan borrower.
FREED’s debt settlement program now comes with CHPP (Creditor Harassment Protection Program) where legal and paralegal teams at FREED ensure that debtor rights are protected when creditor reach out to consumers for debt collection. In case you are facing harrowing debt collection practices, you can schedule a call with one of FREED’s debt counselor today at 0124-6663666.
