The Reserve Bank of India in June 2020 directed many non-banking finance companies, banks, and digital lending companies to update their websites with relevant information on loan and recovery procedures. RBI took this action in the wake of many complaints against the coercive loan recovery actions taken by many NBFCs and Fintech companies.
In the state made in June 2020, RBI has requested money lending companies to adhere to fair practices of lending and recovery through digital or any other platform.
This blog will share quintessential RBI guidelines for loan recovery for your greater good as a borrower. But before you proceed further, learn about loan recovery and NPA.
What is NPA?
NPA stands for non-performing asset. Banks or money lending firms call loan accounts NPAs when borrowers have not paid the loan installment or interest for more than 90 days. When a loan account is declared NPA, the financial future of the borrower is doomed. He is often barred from getting new loans in the future. Getting declared as NPA also severely affects one’s credit score beyond repair.
Therefore, borrowers should repay their loans timely to not be declared as an NPA. If they have been battling financial insecurities, they can share their grievances with their respective lenders to seek a way out of it. In this case, the lender can (if he wants to) give a moratorium, a ‘haircut’ or increase the loan repayment tenure.
What is Loan Recovery?
Loan recovery could be a judicial or non-judicial process carried out if the borrower cannot meet the loan repayment timely. Loan recovery done under fair and legal obligations is promoted by RBI. It has decided some norms, which are explained below.
Loan recovery through the judicial process
Failure in repaying is not a criminal case, and hence, the loan defaulter does not go to jail. But, if the defaulter has not repaid the loan despite sharing the full liability, the lender is liable to file a case against the borrower in Civil Court.
The Civil Court then further decides based on factors whether the defaulter is a wilful defaulter or genuinely has some crisis. In case if the borrower is a wilful defaulter and he has not repaid the loan amount even if he is able to or has diverted the funds to other courses than the original as mentioned while taking a loan or has disposed of or transferred the collateral without the lender’s knowledge, he is liable to get registered under the criminal lawsuit. It could further result in court trials or an arrest.
Loan recovery through a non-judicial process
Generally, due to rising NPAs, lenders get stressed and take coercive measures to recover their NPAs. They may utilize a loan recovery agent to follow up and pressure the borrower for loan repayment. However, there have been many complaints against this coercive measure taken by many banks and NBFCs. Therefore, RBI has whipped these actions by bringing out fresh guidelines for lone recovery.
RBI has even set new norms for loan recovery agents deployed by Fintechs, banks, and NBFCs. The RBI has stated that:
- Loan recovery agents must follow legal obligations while contacting the borrower. In no circumstances must they immorally harass the borrower.
- RBI wants money lending organizations, whether banks or non-banking companies, to follow due diligence while hiring recovery agents. In case of complaints filed against them, they could be summoned or made responsible for the same.
- Borrowers must be informed about the recovery agency deployed against them.
- While meeting the loan defaulter, the loan recovery agent must carry a copy of the authorization letter given by the lending organization.
- In case the borrower has lodged a complaint against the recovery agent, the bank or other money lending organizations should stop the recovery agency until the complaint is solved.
- The money lending organizations and banks must adhere to fair practices and ensure that they listen to borrowers’ grievances.
The borrowers’ rights against recovery
In case of loan defaults and borrowers not being able to pay the loan, the lenders will have to work for the loan recovery legally. If they have been provided with collaterals, they are liable to take over the asset under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
But! Still, at this point, borrowers have got some rights from RBI too.
- They have the Right to Notice
- They have Right to be Heard
- They have the Right to be Treated Politely
- They have the Right to Claim the Balance
- They have the Right to Fair Value.
Understanding the process of loan recovery with examples
The recovery process should depend on the reason behind the loan default. Like not defaulters have the same reason to default the loan, their recovery process must vary and be legally bound.
Defaulter with a good credit score but bad circumstances
Suppose the borrower who has defaulted on the loan has always maintained a good credit score but could not pay off the loan due to bad circumstances like Pandemic in today’s scenario and has lost his job or business. In that case, the lending institution must listen to his grievances and can take action by providing him with further options.
The options can be:
- A moratorium to allow him not to pay EMIs for a few months
- Extension in the repayment tenure will eventually reduce the EMI amount
- Waiving off a certain amount from the loan to make it possible for him to pay in the near future
Although the borrower could here find some sunshine of relaxation with a ‘Haircut’ and a moratorium, he must be ready to bear a detrimental effect on his credit score. In an ideal situation, he should always request increased loan repayment tenure.
Defaulter with bad credits score and bad repayment behavior
On the contrary, the second case has a loan defaulter with a low credit score and bad repayment behavior. Due to this, he has availed a loan with a high interest rate and short repayment tenure.
In this situation, the defaulter is not liable to get a moratorium or a ‘haircut’ in the loan amount. If the loan is secured, the lender bears the right to sell off the asset submitted as collateral to recover the defaulted loan amount.
But if the loan is unsecured, the lender either may opt to send a recovery agency or take the case to civil court, as stated at the beginning of this blog.
Related Articles: Ways to Avail Personal Loans for CIBIL Defaulters Online
It is evident that lending organizations and banks should recover their loans back given to borrowers, but they should not deploy any coercive procedure to recover their loans. They should be more careful in a situation when the whole world is suffering due to the Pandemic.
But this also does not mean that lenders should practice under the law to get their NPAs back. They can abide by the guidelines set by RBI and recover their loans from defaulter borrowers. They can either opt to give a moratorium or extend the repayment tenure so that borrowers can pay off the loan easily. Lastly, they can also seize the asset in case of a secured loan to recover their money.