What happens when you default?


A loan recovery procedure is started by the lending institution when a borrower is unable to make loan payments. RBI loan recovery policies ensure that the process benefits the lender and that the borrower's legal obligations and rights are upheld.

Based on a borrower's financial behaviour and credit score, banks and other lenders can predict when a borrower is about to default. Most lenders will seek to alter certain terms of borrowing to make it easier for the borrower to pay back the loan, such as lengthening the payback period etc.

But sometimes this does not work. In such cases, the lender may write off the debt or designate the borrower as a Non-Performing Asset (NPA) after 90 days of missed payments.

Process of Loan Recovery

The reason for loan default is one of the key factors that define a loan recovery process. If the person has had a genuine financial hardship, a.k.a is a non-wilful defaulter, he may be given the following options:

  • Extension of the payback period, which lowers the EMI,
  • A moratorium during which he won't be required to make EMI payments for a few months
  • A "haircut" wherein the lender waives a portion of the debt. When a bank takes a 'haircut', it means it accepts less than what was due in a particular loan account.

However, the debtor should bear in mind that choosing a moratorium or even a "haircut" could still be bad for their credit rating. The wisest course of action is to repay the loan in full, even if the term is prolonged.

RBI Guidelines for Loan Recovery Agents

Loan recovery agents are prohibited from harassing borrowers in any way by law and are subject to strict standards. These consist of the following:

  • When hiring loan recovery agents, banks must have a thorough framework in place and should be accountable for any complaints made against them.
  • When meeting with the defaulter, the agent must also bring a copy of the bank's notification and the authorisation letter.
  • Banks are not permitted to refer a case to a recovery agency if a borrower has filed a complaint before the complaint has been resolved or dismissed.
  • However, if the bank is persuaded by the evidence that the objections are frivolous, then this is void.
  • The bank must also make sure that complaints from borrowers about the recovery procedure are handled properly.

Borrower’s Rights

Remember, if lenders want to start a debt recovery process against the borrower, they must adhere to specific legal procedures.

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act permits the lender to seize the asset if the loan has been collateralised.

But each loan defaulter's rights must be maintained. These include:

  • Right to Be Observed
  • Fair Value Rights
  • Right to Represent Oneself and the Balance
  • The right to courteous treatment

Despite the best financial planning, you might find yourself in a tight spot at times. There are numerous strategies and resources available to help people escape the debt trap for non-willful defaulters. It is advised to ask for assistance from lenders, family, and friends, rather than bearing the weight alone. However, if your debt is taking over your life and seems impossible to deal with, get in touch with a FREED Debt Expert today!

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