Legal issues of a Personal Loan Default in India

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Money without any security would mean high interest rates are charged by the banks on these types of loans as this would in future become a risky situation for a bank. The banks do not give these types of loan to everybody the banks give personal loan to a person who has a good track record in repayment of the loans.

There can be cases where a default can be done, in cases of personal emergencies or death or bankruptcy etc. In these types of cases banks have certain rights or recourses through which they can recover the amount which they issued to the defaulter.

What Happens when a Borrower is Unable to Repay a Loan?

A borrower may be unable to repay his/her loan due to multiple reasons and results in the following –

1. Impact on the borrower’s Credit Score

One of the major repercussions of loan default is that the credit score of the borrower will decrease significantly.

Defaulting or delaying the EMI payment results in lowering of the credit score and will negatively impact the borrower’s future borrowing capacity, preventing him/her from easily getting loans in the future.

2. Reminders by the Lending Institution

Every borrower is entitled to receiving a set number of reminders and notices from the lending institution. If an EMI is delayed once or twice, notices are sent regarding the late payments.

However, if the reminders and notices are not heeded by the borrower and the EMI is not paid despite this, further action may be taken by the lender such as marking the borrower as a Non-performing asset or NPA. This will prevent the borrower from availing any type of loan or credit in the future.

3. Penalties and Legal Action

In case notices and reminders do not result in the loan being cleared, lenders may impose penalties on the borrower or even take legal action.

A missed payment of a few days can still be rectified but if the payment has not been made for more than a month or two, it can result in serious damages. If collateral has been provided, this may be used as a way to recover the loan by taking possession of the same.

So to avoid further damage to your finance and reputation, it is always advisable to consider some of the below-mentioned warning signs and things you should do when you default on your loan:

  • Your lender issues a notification – When you miss out on your first or second payment, your lender issues a notification. Some lenders will send an agent to your residence or send a message to your registered contact number, asking you to make your payments.

If there is no response from your end, then a few lenders may issue a notice stating the cashing in of post-dated cheques.

  • Negotiate with your lender – Whenever a defaulting situation arises, make sure you approach your lender for a solution. If your reason for defaulting is genuine, which might have arisen due to unavoidable and unpredictable situations, your lender might understand your problem and ease your burden by halting your EMI payments or reducing the payment.
  • Submission of post-dated cheques – Do not ignore the notices regarding the post-dated cheques sent by your lender. Also, ensure that your account has enough balance for the cheque to pass through.

If your cheque bounces, then as per RBI guidelines, you will be charged as a criminal. (clearly stated under section 138 of the Negotiable Instruments Act of 1881).

Remedy Available Under DRT Act

The following modes can be taken by the Recovery officer:

  1. If any amount is due to the defendant from any person, the Recovery Officer may require such person to deduct from the amount, the amount of debt due from the defendant and such person shall comply with such requisition and shall pay the amount to the Recovery officer.
  2. The Recovery Officer has the power at any time by giving a notice in writing to the person from whom the money is due or will be due to the defendant or to any person who holds or may subsequently hold money for or on account of defendant to pay to the Recovery Officer after the money becoming due such amount which is sufficient to pay the amount of debt due from the defendant.
  3. A notice may be served by the officer to the person who holds or subsequently will hold any money on account of the defendant jointly, and until the contrary is proved the shares of the joint holder will be presumed to be equal. The notice would be send to all the joint holders at their addresses and complying with the contents of such notice is mandatory in nature. Where a person whom such notice is sent if proves that he/she does not hold any money for or on account of the defendant then the person will not be required to pay any sum. But if it is found that the statement was false or the proof was false in nature then such person shall be personally liable to the Recovery officer to the extent of his own liability to the defendant or to the extent of defendant’s liability under the suit whichever is less.
  4. If the person to whom the notice under this section (Section 28) has been issued fails to make the payment, then he shall be deemed to be a defendant in default in respect to the amount specified in the notice and further proceedings can be taken against him for the realisation of the amount according to the provisions of Section 25,26 and 27.
  5. The Recovery Officer also has the power to apply to the court in whose custody the money is belonging to the defendant for payment of the amount of money due towards the debt.
  6. The Recovery Officer may recover any amount of Debt due from the defendant by sale of his movable property in the manner laid down in the Third Schedule of the Income-Tax Act,1961.

Finally, the legal consequences you face when you default on a personal loan are:

  • You will face personal loan defaulter’s punishment; you will also be booked under the section of 420 as per the India Penal Code, which involves imprisonment.
  • Your name will be included in the loan defaulter’s list. Credit score will be severely affected and the chances of getting a loan in the future will be significantly reduced.

As per the RBI mandate, at no point of time will the borrower’s rights be compromised.

Breach of contract when it comes to loan repayment itself is not a crime but lenders can approach a civil court in order to recover the same.

If a loan has not been repaid for more than 180 days, the lender is allowed to file a case against the borrower under Section 138 of the Negotiable Instruments Act of 1881.

Sometimes unavoidable circumstances prevent borrowers from being able to repay their loan.. Such cases will not be considered as ‘cheating’ but instead the lender may work with the borrower by modifying the repayment circumstances so as to ensure that the loan is repaid.

However, if the intention of the borrower is proven to be fraudulent right at the time of entering into the loan agreement, a criminal case can be filed against the defaulter.

According to RBI, a ‘wilful defaulter’ is one who indulges in-

  • Default despite having the capacity to pay
  • Diversion of loan or funds
  • Disposal or transfer of collateral provided as security without the knowledge of the lender

Any of the above will result in legal action against the defaulter