Ways of Loan Recover
When a borrower is unable to repay a loan, the lending institution initiates a loan recovery process.
RBI guidelines for loan recovery ensure that the process is beneficial to the lender while also respecting the borrower's legal rights and obligations.
There are two main ways of loan recovery
- Through a non-judicial route
- Through judicial processes
Process of Loan Recovery
One of the main criteria that determines a loan recovery process is the reason for loan default. Let us understand the same with examples.
Situation A
Imagine a situation where a borrower, Mr. X is financially responsible with a good credit score. But due to unexpected circumstances (for eg. the COVID-19 pandemic), he has lost his job and is unable to repay the loan.
In this situation, the lending institution may offer him one of the following options
- Extension of repayment tenure which reduces the EMI amount
- A moratorium wherein he will not have to pay the EMI for a few months
- Accept a 'haircut' wherein the lender waives a certain amount of loan if the borrower is in no position to repay the loan in the near future as well
It is to be noted that opting for a moratorium or even a 'haircut' may have a detrimental effect on Mr. X's credit score. Repaying the loan amount in full even if the tenure is extended is the best possible option.
Situation B
A borrower Mr. Y has a low credit score but has availed a loan even when he is unsure about his repayment capacity. Due to this, although he has received a loan, the interest rate is high and repayment term is short.
He also may not be offered a moratorium or 'haircut'.
If this was a secured loan, the lender may also choose to sell the asset given as collateral to recover the loan amount if Mr. Y defaults. However, Mr. Y has the right to receive any excess amount made through the sale after the loan amount has been repaid.
If neither of these options works, the lender may opt to send loan recovery agents.
RBI Guidelines for Loan Recovery Agents
Loan recovery agents are legally bound by certain guidelines and cannot harass the borrowers in any way. These include
- Banks must have a diligence process in place when it comes to engaging loan recovery agents and are responsible for all complaints filed against them.
- Borrowers must be notified first regarding the details of the recovery agency
- The agent must also carry the authorization letter and copy of the bank's notice when meeting the defaulter
- In case a complaint has been lodged by the borrower, banks are not allowed to forward the respective case to a recovery agency until the said complaint has been solved/disposed of.
- However, this is nullified if the bank is convinced with proof that the complaints are frivolous
- he bank must also ensure that borrowers' grievances regarding the recovery process are addressed appropriately
Loan Recovery Through Judicial Process
Is defaulting on a loan a criminal case? Will loan defaulters have to go to jail?
The answer to this is generally no, except in certain circumstances. Loan defaulting by itself is not a crime and defaulters cannot be arrested.
But if a defaulter has not repaid a loan despite being liable for the same, the lender can file a case in civil court against the borrower.
However, if the borrower is deemed to be a wilful defaulter by
- Either not paying despite being able to
- Or diverting the loan or funds for reasons other than those provided while availing the loan
- Or even disposal or transfer of collateral without the lender's knowledge
Then a criminal case can be filed against the defaulter which may lead to arrest and a trial in a criminal court.
Borrower's Rights
Lenders have to legally follow certain processes if they wish to initiate a loan recovery process against the borrower.
In case collateral has been provided, the asset(s) can be repossessed by the lender under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests) Act.
However, the rights of every loan defaulter must be upheld. These are
- Right to Notice
- Right to Fair Value
- Right to be Heard
- Right to Claim the Balance
- Right to be Treated Politely
For more information about this, take a look at our article on legal action for defaulters.
Conclusion
Banks and other lenders can generally predict when a borrower is on the verge of defaulting based on their financial behavior as well as a credit score.
The process followed by each lender will vary but generally, it involves trying to change certain conditions to help the borrower repay the loan such as increasing repayment terms.
If this does not work then assets may be seized in case of secured loans or loan recovery agents may be enlisted. If neither of these works,
the lender may write off the loan or declare the borrower/company as a Non-Performing Asset or NPA.
Yes, the lender can recover the loan amount from the guarantor unless stated otherwise in the loan agreement.
If the guarantor refuses to comply with the same despite having the finances to pay, he/she will be treated as a wilful defaulter.
In case of the unfortunate demise of the principal borrower, the loan agreement is generally transferred to the legal heirs or the co-applicant. Certain lenders also offer insurance policies against the same and can be explored by borrowers.
An account is considered to be an NPA if the interest or installment has not been paid for over 90 days.
Being categorized as an NPA is harmful to one’s financial future as it prevents him/her from borrowing credit or availing loan again in the future. Additionally, the borrower's credit score will also be severely affected.
