Rights of a Loan Defaulter

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Defaulting on a loan is an associated risk that comes from borrowing and sometimes circumstances beyond your control can drag you into a debt spiral. These circumstances could be bad economic conditions, job loss, partial or complete disability, or a family emergency.

In banking parlance defaulting on a loan is a serious offence. Most of the time, however, borrowers face temporary problems, which can be managed with some extension of payment period. However, if you do not tend to it immediately, it can become tough to handle.

What are RBI rules and regulations that protect the borrower?

1. The recovery agents will not indulge in any physical threat or intimidation to recover loans from the borrower. The banks will be responsible in any such violation.

2. The recovery agents cannot call borrowers at odd times.

3. The banks will be responsible for any undue mental harassment from the service providers.

IBA, the banker’s body has also formulated a code, known as “Model Code” of conduct for the banks when dealing with recovery of loans. This code also reiterates the points made by Reserve Bank of India.

Another body, Banking Code and Standards Board of India, has issued similar guidelines to banks . In fact it has asked banks to check the background of the recovery agents and the agencies to ensure customers are not harassed.

How can you safeguard yourself when temporarily in a fix?

When you default due to sudden change in financial circumstances inform the bank immediately. Most banks will discuss the situation with you and provide options to help you sort your way out of it.

In case you are being harassed by recovery agents discuss it with the bank. You can file a complaint to the bank about this. The bank has to redress your complaint in 30 days. If it doesn’t, you can escalate this to the Banking Ombudsman.

How much time do you have before the bank takes any action?

The bank can call you immediately after a default. However, there are certain general guidelines the bank adheres to. For example, Banks will take action in 3-4 months in the case of a home loan, and 1 month in case of a car loan. In the case of a personal loan, this could be even sooner. Banks generally give you some leeway in cases where the collateral is liquid and marketable (which will not go down in value significantly).

What is the process?

1. Inform the bank about the situation. Tell them that you are facing a temporary cash crunch and have a discussion with them to find a mutually beneficial solution.

2. If you think the rate of interest is unduly high and the rate has come down recently, talk to your bank to reduce the rate. You can also speak with other banks to re-finance your loan at a lower rate. This will reduce the EMI.

3. Talk to your bank on increasing the loan tenure. This will reduce the monthly burden. For example, if you have to pay a loan of about Rs 7 lakhs in 5 years at the rate of 9.5%, your EMI will be about Rs 15,000. If you extend it to for 10 years, your EMI will be a little over Rs 9,000. Your burden is reduced by 45%.

4. Seek help of family members and friends.

5. Make your budget more stringent and also take a checklist of your resources and see if you can liquidate any of the assets like gold, shares and other investments to handle atleast a few of your EMIs and buy you some time.

Are there any clauses in the loan agreement that protect you?

No. Remember, you have taken the loan and you have to pay it back. If you do not pay, bank can take away your assets to recover the loan value.

Source: Financial Express

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