Loan default: Know your rights and avoid issues when unable to repay loan amount

Taking a loan is a common practice for many individuals, be it for purchasing a home, financing education, or meeting other financial requirements. However, a loan is a contractual agreement, and the borrower has to pay the monthly EMIs till the end of the loan tenure. Failing to do so not only attracts a penalty but also has far-reaching consequences. Therefore, it is essential to take certain measures to avoid defaulting on the loan.

According to Manavjit Singh, MD & CEO, CLXNS (Collections), borrowers should take preparatory steps right at the beginning if they feel they may not be able to repay the loan amount on time. They can opt to increase the loan tenure, which will reduce the EMI. It is also important to organize their financial situation and restructure the loan before deciding on the loan terms. In case of a financial emergency, borrowers can request for temporary relief, but they may have to pay a penalty.

If despite these measures, the borrower fails to repay the loan amount, they must be aware of their rights as a loan defaulter. Financial institutions take steps to recover the borrowed amount, but they have to follow certain norms. Borrowers also have some rights that they should be aware of.

One of the rights that a loan defaulter has is the right to be heard. They can write to the loan officer explaining the reasons for their failure to repay the loan, especially if it is due to job loss or a medical emergency. If they receive an official notice from the bank, they can make a representation to the authorities with any objections to the foreclosure notice.

As per RBI guidelines, banks cannot harass or compel the borrower to repay the loan amount at any time of the day. They have to follow a code of conduct while outsourcing collection work and appoint trained agents to handle customers with utmost sensitivity. The time and place of recovery can be pre-decided, for example, between 7 AM to 7 PM. It is the borrower's right to be treated civilly, and they can use legal remedies if the representative of the bank/lender is shouting, using physical violence, or threatening them.

In case the bank initiates the process of auctioning the property to recover the payment, the borrower has the right to receive a notice informing them of the same. The notice should mention the fair value for the property/assets, details of the time and date of auction, reserve price, etc. The borrower also has the right to object if the property is undervalued.

If there is any excess amount from the money recovered after the sale of the property, it will have to be returned to the lending institutions. The value of the property or asset may increase at any point in time, and its value may exceed the amount that the borrower had to pay to the bank. Therefore, it is important to monitor the auction process.

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