What happens if personal loan is not paid in India?

What happens if personal loan is not paid? Is there a punishment for non payment of personal loan? Will the defaulter go to jail straight away?

There will be hooliganism displayed at the defaulters front door by the Banks? What are the bank loan recovery rules?

A person who is under stress due to non-repayment of loan, face further nightmares answering these question. Defaulting on loan payments triggers fear. No doubt.

But it must also be remembered that there are rights of a loan defaulter as well. Banks (lenders) cannot start arm-twisting the defaulter.

[Check your loan burden using online calculator]

Points to remember:

  1. Why a loan defaulter needs protection: Because there may be a ‘genuine problem’, due to which one is defaulting on loan. In the court of law, genuine reasons are given due weightage. It is true that banks will not allow their money to let-go easily. A due course of action will take place. But if one is unable to pay personal loan EMI (say), this does not make him/her a criminal. Read more about What to do when loan EMI is very high.
  2. Loan defaulter will not go to jail: Defaulting on loan is a civil dispute. Criminal charges cannot be put on a person for loan default. It means, police just cannot make arrests. Hence, a genuine person, unable to payback the EMI’s, must not become hopeless. There are rules which will help the defaulter to negotiate with his/her lender.

In case you think that your bank is not behaving properly, you can file your complaint with ‘The Banking Ombudsman‘. Read more about it here.

But it must be remembered that these rules are made for those people who, due to genuine problems, are not able to pay their due EMI. These rules are not for careless, escapists, wilful defaulters, and non-law abiding people.

What a genuine person must know about the consequences of loan default?

What happens if personal loan is not paid in India -2

Types of Loan Defaulters

There are three types of people who default on loans

  1. Careless people: These people are called careless because they took excess loan. They did not analyse their income/expense balance before taking loan. Such people realise their mistakes only after they start paying the EMI. They just cannot afford the EMI expense. Hence the default. Read more about why to become debt free.
  2. Genuine people: These are people who are facing genuine problems. They are people who paid all past EMI’s on schedule. But due to a genuine issue, are not able to pay-back the loan any more. Read more about should you pay home loan early.
  3. Over-smart people: These are people who try to game the banks. They think that they can mislead the bank by giving fake-reasons for non-payment. These people are also commonly referred as ‘wilful defaulters’. These people ultimately gets booked u/s 420 of IPC and may be jailed.

All loan defaulters must first realise that, “loan payment default is not an acceptable practice“. So if one is defaulting on loan, he/she shall not accept a very polite handling of the issue.

But this is only one side of the matter.

People who are stuck due to genuine problems, must also remember that “even the loan defaulters has their rights. Banks cannot simply send recovery agent at their doors to shake them up and show disrespect.

Rights of Loan Defaulters

In this article we will see what are the rights of loan defaulters.

There are RBI’s rules, which all banks must adhere to in handling cases of loan default. This is specially true for handling cases dealing with common men defaulting in small loan like credit card debt, personal loan, home loans etc.

Genuine Loan Defaulter

What Banks can do for genuine loan defaulters? There are rules, and bank’s would do everything within those rules to assist the loan defaulter.

But why banks will help a defaulter? Because it is also in their interest to not allow a loan to convert into an NPA. So what a defaulters should do is to approach the bank proactively and explain them the problem.

As per banking rules, these are the few ways in which banks can help a loan defaulter. In these cases the bank will follow the rules specified as per SARFAESI Act.

  1. LOWER THE EMI: Banks can lower the EMI in two ways: (a) by increasing the loan tenure, (b) by converting non-secured loan to a secured loan. In banking terms it is called as loan rescheduling of restructuring. Lowering of EMI’s due to tenure extension may help few defaulters. But as per bank rules, tenure cannot be increased a lot. As a result, the net effect on EMI reduction is very nominal. But in case of non-secured loan (like personal loan) being converted into a secured loan, reduction in EMI is appreciable. Read more about whether to reduce EMI or tenure in loan prepayment.
  2. ALLOW EMI FREE PERIOD: In cases where the flow of income has been temporarily disturbed, this type of relief may help the borrower. Unforeseen issues like job loss, temporary stoppage in business, operation etc, can be addressed this way. Here the banks may agree to waif-off the EMI collection for a certain period of time (say 3-6 months). After the lapse of this period, the EMI payment must start. Read moe about how home loan prepayment can save lakhs.
  3. ACCEPT A HAIR CUT: There can be a case, where the loan defaulter is in no condition to repay back the loan balance (today or in future). But he is offering to pay a part of the loan. In return for this part-payment, the defaulter is asking the bank to close the loan once and for all. Why a bank should agree for such an offer? Because it is better to get something than nothing. Here the onus is on the loan defaulter to convince the bank to accept the offer. Read more about what it means for banks to ‘take a hair cut’.
  4. FOLLOW SARFAESI ACT: Bank’s will resort to this step only when a loan has been deemed as an NPA. It means, the above three steps has failed. What is SARFAESI Act? The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. As per SARFAESI Act, banks etc can arrange for recovery of their NPA’s without the need to move to the Court of Law.

We will read more about the SARFAESI act in the latter part of this article (see “just unable to pay the loan” below).

What we have seen now, was what best banks can do for the “genuine” loan defaulters.

But the treatment is not the same for other people.

Loan Recovery Agents

Recovery agents are meant for people who are acting smart. These are loan defaulters who have missed their EMI’s, and are avoiding the bank.

In these cases, Bank use the recovery agents to bring the loan defaulter to the negotiation table. But there are few guidelines of RBI regarding the role of recovery agents

In the past, in one of the publications of Reserve Bank of India (RBI) it was mentioned that:

“…engagement of recovery agents is causing serious reputation risk for the banking sector as a whole…”.

Taking a corrective action, RBI revised the guidelines for engaging recovery agent by banks.

There is a clear cut guidelines from RBI that, banks/recovery agents cannot use ‘uncivilised, unlawful and questionable behaviour’ in the process of loan recovery. 

What are the guidelines?

  1. Hiring of professional recovery agents: Banks must do due diligence on the agency before hiring them as a recovery agent. Due diligence shall not only look at the company as a whole, but must also look at people who are involved in the recovery process. The person hired as recovery agents shall pass through police verification. The family background of person in consideration shall also be checked by the agency before hiring. So it means that, if a rowdy (in name of recovery agent) misbehaves, a police complaint can be lodged in the police station. In this case the bank/recovery agency must give clarification on the behaviour of agent with the defaulter. Unsatisfactory reply may result in loss of contract of the recovery agency. Unlawful conduct of the recovery agents with the defaulter is a criminal offence.
  2. First send notices, then recovery agents: Before bank sends a recovery agent, they must issue intimations. In the intimation letter they must first authorise a recovery agency to act on their behalf. Communication of authorisation shall go to the loan defaulter directly from the bank. In case no intimation has been sent, load defaulter can refuse to hear the agents. Recovery agent may self carry the authorisation letter, but this is applicable if past attempts to deliver the letter has failed. Recovery must show the authorisation letter and identity card. In case the agents misbehave, the details of identity card can be used to lodge a police complaint. Bank must also publish the details of recovery agency on their website.
  3. Hear the case of the loan defaulter: Banks must hear the defaulters side of story without a bias. Banks must also issue one more communication to the defaulter. This communication should furnish details of ‘how and to whom’ the loan defaulter can contact in the bank, explaining his grievances. The loan defaulter can then show a copy of discussion with bank, in case the recovery agents further disturbs them.
  4. Recovery agents are Bank’s responsibility: Frankly speaking, it is banks job to undertake loan recovery process in case of default. But RBI has allowed banks to offload the recovery process to a third party. But there are risks when a banking activity is offloaded to a third party. In order to manage the risks, RBI asked banks to provide training to new recovery agents. All recovery agent shall first get a certification, and only then they can act as recovery agents. The training session must explain the “code of conduct & protocol” that recovery agents should practice while dealing with the loan defaulters.

Just unable to pay the loan..

What banks can do when a person is just not able to payback the loan?

In case of personal loan, bank has no collateral. Hence personal loans are called as non-secured loans. In case of personal loan default, banks has only few options:

  • Negotiations: The best bet for banks is to sit on a negotiation table with the defaulter and settle the litigation. This is the most preferred options even for the banks. Why? Because in litigations banks will have to further expend money on the NPA.
  • Use of Post Dated Cheques: But if the negotiations fail, the bank may decide to go to court. But as loan default is a civil dispute, arrest cannot be made. Hence what bank may do it to present the post dated cheques for clearing. If the cheques get bounced, then as per rules, arrest can be made.

In case of secured loans like (Auto, home loan etc), banks can do the following:

  1. Issue Notice: The bank will first declare your loan as an NPA. When a loan becomes NPA? When dues are not paid for more than 90 days. After this, bank will have to issue you a ’60 day notice’ under SARFAESI Act. In this notice period, the loan defaulter can payback the dues and close the case.
  2. Issue Public Notice: In case of Auto loan, the collateral will be like car, bike etc. In case of home loan, collateral will be a residential property. If loan is not cleared within the 60 day notice, bank will issue a 30 day public notice informing about the sale of asset.
  3. Issue Fair Value Notice: Before the asset is sold, the bank must also issue a notice informing about the fair value of asset that is going to be sold (in the public auction etc).
  4. Seize The Collateral: After notice period is served, the bank can immediately seize the collateral (asset), and initiate its sale proceedings.

What the borrower (loan defaulter) can do here? Not much. But if the defaulter thinks that ‘property seizure’ or ‘property fair value’ has not been handled properly, they can raise the objection in written to the bank. The bank is obliged to reply within 7 days. But after the reply, the bank can go ahead and sell the asset as per the public notice issued.

Final Words…

One must appreciate the fact that, Banks/Government cannot be lenient towards the loan defaulters. If they are lenient in one case, then it will be taken as precedence. People will start taking loan default as an excusable crime.

It is essential for a borrower to understand that availing loan is a very serious step in ones life. One must think 100 times before getting into debt. All pros and cons must be studied by the borrow before taking even a penny of loan.

Taking loan is a risk. If loan is small, risk is less. If loan is big, risk is more.

The point is, a borrower must deliberate the consequences of loan defaulting before getting into the loan.

Read more about how to get out of debt faster.

20 Comments

  1. In my experience once you are a defaulter immediately you become untouchable for credit agencies (NBFC/Banks) it should be but it is very bad situation for a genuine borrower. In my case i had taken a lot of loans whether it is personal car or consumer durable, in the recent year i went unstable and stuck in debt trap my car loan went overdue for 3 months and I managed to pay EMIs but still 3 emis are outstanding my cibil is effected from 780 to 680 outstanding amount is not so huge compare to my EMI vs income ratio but the thing is all loans need to be consolidated at one place. But due to different financial agencies no one ready to take load on them everybody is trying to keep me away. If i try to know any way a simple answer is repay overdue and continue EMI payment on time for 6 months then your application can be considered it is very simple way but what to do if a person is stuck but ready to repay. i hardly find any competitive agency from government or any private firm who can give hand to pull out the borrowers and such situation will help loans to be converted into NPA unintentionally. I hope our experts can say something on this issue. and may guide me to get out of the situation.

  2. Amazing tips,thank you for sharing this loan post really this is awesome tips for guide as loan.

  3. Hi,
    Kindly help me to understand if without prior notice bank can put lien to the account for 18 years old personal loan?

  4. I have taken a personal loan and quarter dues are paid, after that i got married and husband is not aware of the loab story , and he will never ready to take that burden as he is not rich so. Parents also very poor. My dues are pending for last 5 years. They have some post dated chqs of mine. I am afraid what they are going to do.

    Please let me know what action bank can do on me.

    • It depends on the type of loan:
      – In case of home loans etc, the co-borrower or loan guarantor is responsible to clear the dues. If they are not able to pay the dues, the lender can legally seize the collateral.
      – In case of personal loan, there is not much lenders can do. Legal heirs are obliged to pay-back the unpaid dues.

      • If borrower is not pay his emi in case bank has to right to cut gurantors account
        Without any information

  5. I AM TAKEN PERSONAL LOAN FROM HDFC BANK(6.86LAKHS) & AXIS BANK(6 LAKHS) FOR MY CHILD HOOD FRIEND BUSINESS DEVELOPMENT ON JANUARY’18. BUT HE EXPIRED DURING MARCH’18. HIS FAMILY MEMBERS NOT READY TO PAY THE EMI. I AM PAY THE EMI’S UPTO OCTOBER’18. MY NET SALARY IS RS.34,000/-.TOTAL EMI IS RS.30670/-. SO I SOLD THE JEWELS AND I PAY THE EMI UPTO FEB’19.
    NOW THERE IS NO SOURCE. MY MOTHER IS 64 YEARS OLD. SHE NEEDS REGULAR MEDICAL TREATMENT.
    WITH THE AMOUNT ONLY I PAY MY RENT, MOTHER’S TREATMENT AND DAY TO EXPENDITURE.
    I AM WORKING IN BSNL AS A CLERICAL STAFF. MY RETIREMENT DUE IS 2035.
    I WROTE LETTERS TO HDFC BANK AND AXIS BANK TO REDUCE THE EMI AMOUNT AND EXTEND THE EMIS TO 100 INSTALLMENTS. BUT THEY DIDN’T ACCEPT IT. IT IS VERY DIFFICULT FOR ME TO RUN THE FAMILY AND PAY THE EMI’S. WHAT I CAN DO TO REDUCE THE EMI AND EXTEND THE EMI SCHEDULE?

  6. Hlo i am unable to pay my personal due to left job.. But i was regular payee of bank but now i am unable to pay. I have also make a call to HDFC customer care for increase my tenure but they denied… Plz suggeste me

  7. NO Bank follow RBI rules. RBI also know this. Gangsters appointed for Recovery in Pune. They directly come to your home with arms. If complaint to RBI, nobody take action. Better way not deal with bank. Not for loan and not for saving. Earn and Eat method. No Bank Relations in all life is better solution and Happy Life.

  8. Does civil gets wiped off after 7 years like it happens abroad…or it still stays in ur credit score pls answer

  9. This is very informative on personal loans.I am interested to know about these Bad credit personal loans guaranteed approval 5000,hoping to succeed and avail personal loans.Good learning, thank you.

  10. Good to be here, very informative post.Thanks for sharing this.I am interested to know about these loans services to get a loan for my business, hoping to succeed and avail Merchant cash advance loans.

    • Personal loan is a non-secure loan. If more than 3 EMIs has been defaulted, the borrower is treated as a “loan defaulter”. In such cases, the post dated cheques (PDCs) may be encashed by the bank. If the PDC’s gets bounced, here it becomes serious, as cheque bouncing is considered a criminal offence. The leagal team of the lender will take the borrower to the Court of Law.

      • Hi Mani,

        It’s a very useful article. I, however, would like to know the possible consequences for the following situation:

        My wife took a Personal Loan of Rs. 4.5 Lakhs in Nov 2017 from Yes Bank, when she was doing a job. For an year, all the EMIs were paid on time, and then due to post maternity issues, she was unable to join back office and now she is not getting paid. She might soon lose her job, too. She is not in a condition to join another job right now, and it’s a genuine issue for us.

        I have my own Home Loan and other liabilities from which I can’t take out a single penny to repay her loan. If it was under my control, I would have done it. I am neither a guarantor nor a co borrower of her PL, by the way. The condition is such now that we can’t afford to pay any amount to the bank as of yet. She contacted the bank and asked for an extension of EMI, but the bank is not ready to provide any such thing. They are asking for the EMIs to be repaid on time.

        As of now, only one EMI has been missed. My wife sent E-Mails to the bank and spoke over phone, informing about all her genuine problems, but the bank seems to be rigid in their terms, i.e., to get all the EMIs on time.

        The bank has got three post dated cheques from her at the time of disbursing loan.

        What We can do: At max, as the current situation is concerned, we can sell whatever little gold we have, and my wife can withdraw her PF (it will take some time though), however, the accumulated amount won’t exceed 2 Lakhs under any circumstances. We can only offer that completely accumulated amount to the bank for a settlement.

        My question: In this scenario (which is completely genuine), can the bank still issue post dated cheques so that they get bounced and then file a criminal complaint against my wife? We are worried about our new born child, who is not even a year old now, and he must be taken care of by his mother.

        Can she file bankruptcy? If she can, will it help? What are the procedures?

        What is the best doable thing at this situation? To reiterate, it’s totally a genuine situation and we definitely are not trying to escape or be oversmart with bank.

        Your answer will be very helpful at this situation. Kindly help.

  11. The last step is, banks taking possession of the Security.
    In case of personal loan, there’s no security against Loan then what?

Leave a Reply

Your email address will not be published.


*