Various Companies offer loans in times of financial crisis, and the interest offered is at various rates, according to the Bank or Non-Banking Financial Institutions (NBFCs.) When a borrower defaults by not repaying the EMIs for loans, banks may initiate certain procedures.
More importantly, it should be understood that defaulting on a loan is not a crime but that a borrower has certain rights even in case of default; however, many borrowers are unaware of such rights and thus become prey to undue pressure. This article discusses what steps can be taken by the banks on loan default and states the rights of the borrower to help them cope with such situations.
What Actions Can Banks Take in Case of Loan Default?
When a customer defaults on a loan, the bank will go through a series of steps to withdraw the dues. Given are the various standard practices followed:
- Pre-Default Notice: Before a loan goes into default, the bank gives the borrower a pre-default notice for any missed payments and possibly suggests an extension or a revival of the repayment program (under the loan EMI rules).
- Legal Notice: When the borrower fails to make the repayment, the bank will then serve a formal notice (laws for loan defaulters) and may approach court.
- Recovery Processes: The bank can enforce the seizure of mortgaged property, initiate salary wage garnishment for loan repayment, or commence asset disposal.
Nonetheless, borrowers have certain rights even during this process, which protect them against any unfair practices.
What Recovery Agents Cannot Do?
Based on the nature of their job relating to collecting dues, recovery agents are hired by banks to work legally within the boundaries of the law. All that they cannot do are as follows:
- Harassment and Intimidation: Recovery agents cannot put any threats or abusive language into practice.
- Outside Specified Hours of Contact: Between 7 a.m. and 7 p.m. is the only timeframe the collection agent can contact borrowers.
- The law does not permit the imposition of any form of physical or mental pressure (rules for recovery agents).
In case of any violations of these guidelines on the part of recovery agents, borrowers have a right to file a complaint with the concerned banks or Banking Ombudsman.
Bank’s Obligations Before Taking Action
The processes adhered to by the banks are expected to be clear and amenable to legal scrutiny, thereby leading to all recoveries having to be done by law. Some important aspects are discussed as follows:
- Prior Notice: Before declaring a loan account an NPA, it is the established bank practice to make a notification to the borrower. Now, in terms of the definition of an NPA, after 90 days of delinquency, the account goes NPA, and, thereafter, a 60-day notice must be served by the bank before proceeding further.
- Public Notice for Basic Selling: If the bank intends to sell the mortgaged property, a 30-day public notice must be given for the auction with details regarding the auction date, the reserve price, etc.
- Fair Valuation: The sale must be conducted at a fair market value, and any surplus amount after loan recovery would be payable to the borrower.
Legal Rights of Loan Borrowers
Even if he has defaulted on the loan, this does not mean that the borrower has lost several rights under the law:
- Right to Prior Notice: It is the right of the borrower to obtain a prior notice from the bank before the property is seized or an action for recovery is initiated. Recovery action can be taken only after a 60-day mandatory notice is served on the borrower.
- Right to Fair Treatment: Defaulting on a loan does not make one a criminal. Yet, while recovering dues (loan defaulter’s rights), the banks have to act by fair play and in conformity with the law.
- Right to Transparent Public Auction: In case your property is auctioned by the bank, a 30-day public notice must be given, and the process should not be opaque.
- Right to Surplus Amount: The borrower has the right to claim any surplus amount raised at the auction when the auction proceeds are more than the outstanding loan amount.
- Right to Complain: If the recovery agent or bank has violated your rights, you may complain to the Banking Ombudsman or take legal recourse.
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