Bank Notifications and Reminders

Most banks and NBFCs permit one or two payments to fall through the cracks that could also be considered late payments. However, if the borrower does not repay the loan in three consecutive months, the bank notifies the borrower in accordance with the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (SARFAESI) and requests that the borrower make a prompt EMI payment. The borrower is classified as a non-performing asset, or NPA if their default lasts longer than 90 days. The last thing a borrower wants is to become an NPA, as this will eliminate all of their borrowing options in the near term.

Borrower's Rights

A Right to Appropriate Notice

Your bank account is classified as a non-performing asset (NPA) if loan repayment is overdue by more than 90 days. In such situations, the borrower is given a 60-day notice by the lender. The bank has the right to sell the assets if the borrower is unable to pay the outstanding EMIs within the notice period.

Even in this case, the bank must publish a second notice to the public for 30 days before the assets can be put up for auction.

Right to the Auction Proceeds

The lender will sell the asset at auction, and the defaulter can then claim any excess funds (if any) left over after paying the debt. The lender is only permitted by law to recover the amount that is owed and give the borrower the surplus.

Right to Heard and Treated respectfully

During the notice period, the borrower has the right to object to the lender's notice of repossession.

During the loan recovery process, the borrower cannot be mistreated, harassed, humiliated, or abused.

Asset Valuation Right

Prior to the asset being sold, banks are required to publish a notice outlining the sale's specifics, including the asset's fair market value, the reserve price, and other information about the auction, such as the location, date, and time.

The asset's sale price is decided by the values that the bank appoints. The borrower may challenge the auction if they believe the asset is undervalued. Another option for the defaulter is to find a new buyer and introduce them to the lender.

What remedies does the lender have in the occurrence of loan default?

According to the Reserve Bank of India's guidelines, banks must allow borrowers sufficient time to repay any loan debts. During loan recoveries, banks must follow a strict code of conduct. Here are some of the most common actions taken by banks and lenders in the event of a loan default:

• The majority of lenders notify borrowers in advance about past-due amounts, along with the required payment of interest and penal interest.

• The borrower must have a clear plan of action for repayment or the bank may take legal action if it becomes known that the borrower is deliberately defaulting on payments. The bank may contact the guarantor if the loan agreement calls for one because they are responsible for repaying the loan in the event the applicant defaults.

• Banks usually start following up after a single missed repayment. However, the next steps are determined by the borrower's approach and personal circumstances.

• Banks may offer EMI holidays to the borrower or his/her family in situations such as death, health issues, or accidents that may cause the repayment schedule to be broken unintentionally.

• Failure to heed the bank's reminders may set off a chain of events that begins with the bank issuing a legal notice to the borrower.

• In the case of multiple loans, a lender may levy a penalty for defaults and late payments. This is typically applicable to unsecured loans in which the lender cannot liquidate collateral in the event of non-payment by the borrower.

What steps can borrowers take in case of loan repayment default?

Every borrower has an excuse for why, at some point during the loan term, they are unable to make timely EMI payments. It might be because of a job loss, a personal emergency that used up all the savings, significant medical expenses, or another factor.

Here are some options that may be taken into account if a borrower is unable to repay a loan on time for any reason:

Reschedule payments

One option for borrowers is to notify the bank of their current inability to make loan repayments and request a temporary EMI holiday. In the event of a job change or temporary loss of employment, a borrower may face financial difficulties. Banks may accept such legitimate reasons, but they may levy penalties for late repayment.

One-time payment

This option is typically used when a borrower is unable to repay a loan in full because the interest owed is greater than the principal balance. In these circumstances, the bank may already have designated the loan as a non-performing asset (NPA). Due to bankruptcy or other circumstances, the borrower might not be in a position to make any repayments. The borrower may be given the choice by the bank or lender to repay the loan with a smaller sum. However, since it may have a negative effect on the credit report and lower the credit score, borrowers should use this option with caution.

EMI reduction

If a borrower is having trouble making their EMI payment, they might think about asking to have their monthly payment reduced. By approaching the lending institution and asking them to lengthen the loan's term, they can achieve this. This may result in a lower monthly EMI payment but a higher interest expense. After the borrower's financial situation has stabilised, he or she may raise the EMI payment to previous levels.

Consolidating debt

Another solution to get out of a difficult debt situation is debt consolidation. It entails taking out a new loan to pay off all outstanding and existing loans. Borrowers must take care to find a loan with low-interest rates compared to prior loans, though. A personal loan is a good tool for consolidating debt. Since these loans are unsecured, it may be simple for borrowers to apply for them, and the larger loan amount enables them to pay off all of their current debt.

Restructuring of loans

In the incident that borrowers are unable to adhere to the loan terms, they can request that the lender relax them through the reduction of charges, lower interest rates, extension of the loan tenure, moratorium period on interest, and so on.

Impact on the credit score

A borrower's credit score may be negatively impacted if they miss loan repayments (EMIs). All lending institutions report the repayment history of defaulting borrowers to credit reports, which may cause the credit score to drop significantly. Future access to credit may suffer as a result of this.

Lenders look at a borrower's credit history first when he or she approaches a financial institution for some type of credit facility. Lenders view a default history and subsequent lower credit score as risky credit profiles because there is a high likelihood of future defaults.

Even if a borrower has previously defaulted, he or she may be able to obtain a loan in some cases but may be required to pay additional interest rate charges as compensation for the bank's additional risk.

Failure to Repay Secured Loans

Secured loans necessitate the pledge of an asset or collateral. The collateral can be anything of tangible value, such as jewellery or real estate. When an EMI is not paid on time, the bank/lender will decide to sell or auction the collateral and will notify the borrower of the date of sale or auction. However, the borrower is entitled to the amount remaining after the auction and all required dues have been paid.

If the borrower decides to settle the debt after the letter has been sent, the auction can be avoided. Once the bank receives the owed EMIs, the auction will be cancelled and the collateral will not be sold.

Conclusion

While borrowing a loan has many advantages, it also has some responsibilities, one of which is timely repayment. If a borrower is unable to make timely repayments, he or she must notify the lender before the lender initiates a collection process. Although the recovery steps differ depending on the lender, it can either mean certain concessions for the borrower or legal action. As a result, it is critical to obtain a loan only when one is able to repay it in full and on time.