A loan may be utilized in many situations for numerous purposes. However, it’s important to remember that a loan is fundamentally a debt.
According to the repayment terms agreed upon, a loan must be repaid to the bank or company it was borrowed from. If any individual fails to pay back the money owed to the lending institution, it has certain avenues it may take to recover the money.
In this article, we will be giving an overview of the different methods by which a bank can recover a loan.
Scenarios for loan recovery:
There are fundamentally two types of loans that can be availed. These are secured loans and unsecured loans.
Process of recovery for secured loans:
Secured loans are types of loans secured against specific properties and assets of the borrower. For example, in the case of a gold loan, the money is borrowed against physical gold possessed by the borrower. Or, in the case of a house mortgage, the money is loaned against real estate belonging to the borrower.
If the borrower somehow fails to pay back the money owed to the bank or financial institution, they can assume possession of these assets pledged by the borrower and use them to regain the money lost in the loan.
Process of recovery for unsecured loans:
Unsecured loans are not dispensed against any fixed asset or assets. Instead, the bank or financial institution checks the borrower’s transaction history and credit scores to evaluate their reliability as a customer before giving the loan. An example of this type of loan is a personal loan.
In the case of such loans, it becomes a tricky prospect to recover the money if the borrower fails to make payments since the bank is not by default entitled to any of the borrower’s properties.
Instead, the terms mentioned in the loan contract and judicial recourse become the chief avenues for recovery. The banks cannot directly lay claim to any property of the borrower until and unless exclusively permitted by the court.
As per legal guidelines, the procedures mentioned below must be followed by banks and other financial institutions to recover unsecured loans.
Initial response regarding damage control:
In the case of unsecured loans, the banks must have a waiting period before the borrower can be considered a defaulter. Only if the borrower misses payments on a regular basis over a long stretch of time can the bank consider him so.
Typically if the borrower fails to make deposits for 90 days, that is three consecutive months, the bank considers that person’s account a non-performing asset or NPA.
After an account is categorized as NPA, the bank can start legal procedures against the defaulter. Usually, most banks provide a 60 days notice period to the defaulters, giving them a chance to clear the due debts before moving on to court proceedings.
There is also an avenue of communication between the customers and the banks. If the borrower can convince the respective financial institution that the delay in payment is a temporary hitch and not going to be a permanent problem, the bank might choose to delay the court proceedings and give a chance to the customer.
This is possible if the customer has a good credit score and a history of being a valuable and dependable customer in the past.
Dealing with a lien marked on customer assets:
In some cases of unsecured loans, the customers mark a bankers’ lien on some personal assets like fixed deposit, bond, safe custody, mutual funds, shares, and others.
These are not directly mortgaged, but if the lien is marked, the bank can freeze these assets, making it impossible for the customer to make withdrawals from or sell these assets until the debts from the loan are clear. However, this can only happen if the borrower has agreed in the contract to use the marked lien assets as a penalty if he fails to make payments.
Response when the customer fails to clear the debts even after the 60 day NPA notice:
The bank owns the right to block the borrower’s access to his savings account and use that money to recover the owed loan.
If the bank has any due to the borrower, the defaulted amount can be deducted against that amount.
The bank can recover its money from assets placed in safe custody in its accounts or from fixed deposits, if any, that the borrower has placed in the bank’s care.
Legal avenues that the bank can take in case of loan defaulting:
If all the other methods fail, the bank may approach a court for legal recovery of its money. The Civil Procedures Code of 1908 gives financial institutions this right. If a bank gets a ruling in its favor, it may even go as far as asset seizure.
The bank may file a suit against the borrower. Two factors decide the jurisdiction of this suit- territorial jurisdiction and pecuniary jurisdiction.
The pecuniary jurisdiction is determined by the total amount of money demanded by the bank as due. The case moves to a district court or high court, depending on this.
Assuming the court moves in favor of the bank, this is the final notice a borrower will get to clear his debts. If he fails to clear the dues, the bank can approach the Debt Recovery Tribunal for outstanding loans exceeding 20 lakhs INR.
If deemed appropriate by the tribunal under the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the bank can at this stage move on to lay claims over properties like real estate, cars, gold, etc., to make the loan recovery.
It’s important to note that the borrower also has the right to present his case to the tribunal for consideration before the final verdict is passed.
Rights possessed by a borrower who failed to clear loan debts:
The borrowers and banks must adhere to the Fair Practices Code or FCP outlined by the Reserve Bank of India. These codes provide some rights to a defaulting borrower.
Right to sufficient notice:
The concerned bank must provide appropriate legal notice to the borrower giving him adequate time to make amends for the missed payments before taking any legal actions against him.
Right to be heard:
The borrower has an equal right as the bank to present his case to the court of law if legal proceedings are initiated.
Right to humane treatment:
If the borrower is in some financial crisis because of forces and circumstances beyond his control, the court can decide to provide some relief. The loan recovery process ensures that the person is not driven to the brink of death.
Right to report grievance:
If the borrower has any issues with their interactions with the bank and any discriminations or discrepancies in their financial practices, then he has the right to address them legally. The bank cannot make criminal threats, harass or coerce a borrower under any circumstances.
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The world of finance can be a very uncertain territory. Loans can be lucrative and efficient ways to manage your economics, but things can turn ugly if circumstances prevent you from paying the debts back.
Even if it is not your intention to withhold payments or cheat the bank, you must be ready for any unforeseen scenarios which force you to do so. It is crucial to be aware of the steps that can be taken against you if that indeed becomes the case.