In this blog post, Syeda Muneera Ali talks about the rights of a loan defaulter.
Finance is a major part of an individual’s life. You need money for each and every little aspects of your life. From birth to death, you spend millions of rupees for various life events that you choose to celebrate, achieve or gift. But, what do you do when you need money more than what you have? Well, that is when your eternal savior – the bank – helps you.
At this point, even though your bank may seem to be your savior, it often tends to become tiresome and cruel in the future. This is because, whilst taking a loan may seem easy (it really isn’t), clearing your debts is lot harder than you actually plan and imagine it to be. It is painful and extremely tedious. And, there are times when no matter how hard you try, there is a pretty high chance of defaulting your payments thus, making you a loan defaulter.
Being a loan defaulter is not something to be ashamed or scared of as long as you genuinely have trouble.
When a borrower takes a loan, he enters into a legal contract with the lender wherein he is liable for the money he borrows from the lender (a bank or any other financial institution eligible for such purposes) as well as for any extra charges the bank might incur to recover the money from the borrower.
As such, the bank is allowed by law to use any steps in accordance with the law to recover a loan if has defaulted on it.
However, the key point to be considered in this aspect is ‘in accordance with the law’.
Loan Recovery by Banks
Banks are established legal entities and as such, they are bound by law to follow strict guidelines when it comes to recovering a loan.
The recovery of a debt is often a sensitive process and a process which can put a significant amount of strain on the defaulter. Recognizing this, the Reserve Bank of India and the Indian Banking Association has strict rules and guidelines which outline the proceedings banks are supposed to follow to recover loans and the general codes of conduct which govern any contact the bank might make with the borrower for such a process.
Being a loan defaulter does not strip you of your rights and basic humanity. You are still entitled to be treated as a respectable individual.
Here are some rights that you are entitled to irrespective of the fact that you have defaulted on your loan –
- Communicating with the Bank
The bank has a legal responsibility to be civil in its contact with the customers and any form of bullying or harassment is considered a criminal offense.
- You must not hesitate to contact the bank if you are finding it difficult to repay your loans for some unforeseen circumstances. The banks are expected to consider any genuine difficulties expressed by the consider while considering the steps for debt recovery.
- You can try to talk about increasing your loan tenure which will reduce the monthly EMI. You may also approach the bank about restructuring the loan, asking it to relax some of the terms and conditions.
- If you are facing a temporary problem regarding your finances, you may approach the bank for a temporary relief which may be granted after accruing some additional penalty charges.
- If you have an unsecured loan, you can try converting it into a secured loan as unsecured loans generally tend to have higher interest charges. It is always advisable to contact the bank and notify them of your situation if you are facing a problem regarding the repayment of loans.
Trying to avoid the banks will only further escalate your problems and make the banks suspicious of your intention regarding repayment of the loan.
- On the other hand, if you notify the bank of any genuine problem and convince them of your intention to pay off the loan, it may offer you help to cope up with the financial situation better.
In case the interest accrued on a loan exceeds the principal amount, the bank usually classifies such a loan as a non-performing asset (NPA). In such cases, the bank may offer the defaulter the option of a one-time settlement where you can settle the loan through a small payment.
Though such a settlement reflects negatively on your credit score, this may be an option if you are in no position to repay the loan.
- Contacting the Loan Defaulter
The bank is expected to follow strict guidelines with regard to contacting the loan defaulter, particularly with respect to the timing and place of any such contact.
You should realize that it is within your right as a borrower to decide a particular place where the bank can contact you. If such a place has been decided and agreed upon, the bank must honor such an agreement. In the case that a place of contact has not been decided, the bank may contact you in your house.
The bank may also try to contact you in your workplace but only if it is unable to contact you at your house. Your privacy is of utmost importance and any violation of such privacy is a very serious breach of banking ethics.
To respect this privacy, the bank cannot contact a loan defaulter at a certain time or place if the defaulter has explicitly requested not to be contacted at a particular time or in a particular place.
As specified by IBA, banks are allowed to contact the defaulters through phone only during stipulated office hours, between 0800 hours and 2000 hours, unless the nature of your job requires contact at other time. Any such contact is to be recorded for future evidence, clearly showing the time, frequency and the content of such conversations.
- Period of Notice
The banks usually follow some guidelines to contact a defaulter after a default and this notice period for repayment usually varies with the type of loan.
However, for any loan, the bank has to inform the borrower of his/her dues with a legal notice before it can begin any proceedings against a defaulter. A minimum period of seven days is to be given by a bank before it can begin recovery proceedings against a defaulted loan.
- Repossession of Property
The Indian Banking Association has clear policy guidelines with regard to repossession of property to recover any debts. The sole portion of any such repossession to recover any outstanding debt and not to deprive the borrower of his/her property.
The bank can only take the possession of a property after following the due process of sending a legal notice and the bank must take reasonable care in ensuring the safety and security of an asset after recovering possession.
- The recovery process will involve a transparent valuation as per law and transparent sale. If your feel that your security is being undervalued, you can yourself contact potential buyers who you feel will offer a better price than the valuation of the bank and inform the bank about them.
- The bank can take legal steps to recover any outstanding balance from the defaulter after the sale and it also has a legal obligation to return any excess amount obtained through the sale after realizing all outstanding dues and related expenses. So, do not write off any property the moment it is repossessed and this is particularly useful to keep in mind when a property is pledged as a security in these days of soaring property prices.
- The repossession of security by banks as a way of recovering the loan is intended as a last resort and the banks are obliged to hand over the repossessed property back to the borrower if its dues are cleared in full at any time between the repossession and the sale of the security. In addition, if you notify the bank of genuine reasons which affected your ability to pay the installments in time, the bank may consider returning you the security after receiving the installments in arrears and if it is convinced of your ability to stick to the repayment timelines in future.
- Rights regarding Recovery Agents
Banks often employ specialized people for the recovery of loans called recovery agents and the recovery agents are expected to follow a strict set of rules and code of conduct.
- A person must also be authorized by the Indian Institute of Banking and Finance to act as a recovery agent and it is the duty of the bank to properly investigate any complaint against its recovery agents and it is essential that the bank posts the complete details of such agents on their websites. Such information should also be made available at the bank branches for the knowledge of all the customers and the bank will inform you if it has employed a recovery agent towards the recovery of your loan.
- All recovery agents employed by the bank must carry identity cards and authorization letter from the bank. The recovery agents must maintain your privacy and behave with you in a civilized manner, with any conversation being strictly limited to business matters. They can only contact your family if they are unable to contact you in any way and if they threaten you to tell your neighbors and co-workers about your defaulted loan, it is illegal and you have a legal right to complain to the bank.
- If you feel you are harassed by a recovery agent, you can complain to the bank and the bank has to redress your grievance within 30 days. If the complaint is not addressed to your satisfaction you can contact the banking ombudsman.
- It is true that any loan is a legal agreement which includes an obligation on your part to repay it. However, since it is a legal agreement, the process to recover it once you are unable to pay it as per agreement also has a legal framework to adhere to. A defaulter has his/her rights and the banks are expected to protect those rights.
- The official declaration of a ‘defaulter’ and initiation of recovery proceedings against someone varies depending on the type of loan and is supposed to give you sufficient time to prepare for any such case.
Irrespective of the type of the loan, the borrower always has a right to be treated humanely and any undue harassment, humiliation or breach of privacy of the borrower is a serious breach of the banking rules and ethics which are punishable by law.
- It is imperative to keep in mind that a loan comes with a legal as well as an ethical obligation to return it. However, such an obligation works both ways. Just as a borrower is supposed to return the money taken as a loan, a lender is also bound by certain laws and ethical practices it is bound to follow while taking any steps to recover such a loan. If one is facing difficulties in following the agreed upon timeline of returning a loan, the default tendency is to avoid making contact with the creditor institution.
However, such a step often further complicates the financial situation and makes the banks unsympathetic towards any genuine difficulties you might face. On the other hand, informing the banks of any genuine difficulties you are facing and about any unforeseen financial circumstances may make them consider your situations and offer you advice with regard to financial matters and/or restructure the loan to help you in the repayment process. Even a consultation with family and friends may help one in overcoming temporary problems of the cash crunch. Further, one might take the advice of professional credit counseling services in such cases.
Even in the case one fails to repay his/her loan, one still enjoys certain rights. The foremost of these rights is the protection from any harassment and humiliation and such ‘pressure tactics’ involving undue harassment has no place in the legal and ethical standard a lending institution is expected to follow. The creditors are supposed to respect the borrowers’ right to privacy and any recovery process has to follow a transparent and fair outline (as set by the relevant financial laws and guidelines issued by the Reserve Bank of India (RBI) and the Indian Banking Association (IBA)) and such guidelines guarantee a just and humane treatment of the defaulter.
What else do you think a loan defaulter can do to avoid embarrassment & pay the loan on time. Comment your views below and share the article.