What are the rights of a loan defaulter?

Defaulting on a loan is an associated risk that comes from borrowing and sometimes circumstances beyond your control can cause you to be dragged into a spiral of debt.

These circumstances could be bad economic conditions, job loss, partial or complete disability, or a family emergency.

In banking parlance defaulting on a loan is a serious offence. Most of the time, however, borrowers face temporary problems which can be managed with some extension of payment period.

However if you do not tend to it immediately and take corrective action it can become tough to handle the mounting debt.

Recovery agents employed by banks in the past have shown high handedness in handling customers in debt, which was brought to the notice of the Reserve Bank of India as a result of which it has enforced certain rules to protect the borrower's interests.

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What are the RBI rules and regulations that protect the borrower?

Some of the rules and regulations that RBI has set to protect the borrower are the following:

1. The recovery agents will not indulge in any physical threat or intimidation to recover loans from the borrower. The banks will be responsible in any such violation.

2. The recovery agents cannot call borrowers at odd times.

3. The banks will be responsible for any undue mental harassment from the service providers.

IBA, the bankers' body, has also formulated a code, known as 'Model Code' of conduct for the banks when dealing with recovery of loans.

This code also reiterates the points made by Reserve Bank of India.

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Another body, Banking Code and Standards Board of India, has issued similar guidelines to banks across the country.

In fact it has asked banks to check the background of the recovery agents and the agencies to ensure customers are not harassed.

There are enough laws in place to protect the borrowers from harassment and torture. However, we must remember, at the end of the day, banks have the right to recover the loan from the borrower by proper and just means as formulated by the RBI.

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How can he safeguard himself when he is temporarily in a fix and cannot repay his loans?

When you default due to sudden change in financial circumstances inform the bank immediately. Most banks will discuss the situation with you and provide options to help you sort your way out of it.

In case you are being harassed by recovery agents in spite of your efforts to discuss it with the bank you can file a complaint to the bank about this.

The bank has to redress your complaint in 30 days. If it doesn't, you can escalate this to the Banking Ombudsman.

How much time does he have before the bank takes any action on his defaults?

The bank can call you immediately after a default. However, there are certain general guidelines the bank adheres to.

For example, banks will take action in 3-4 months in the case of a home loan, and 1 month in case of a car loan. In the case of a personal loan, this could be even sooner.

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Banks generally give you some leeway in cases where the collateral is liquid (which can be easily converted to cash) and marketable (which will not go down in value significantly).

As stressed before, it is vital that you speak with your bank on this. Communication is very important in such cases and only the bank can help you.

What is the process?

Here are some options you can try out to reduce the impact of temporary cash flow problem.

1. Inform the bank about the situation. Tell them that you are facing a temporary cash crunch and have a discussion with them to find a mutually beneficial solution.

2. If you think the rate of interest is unduly high and the rate has come down recently, talk to your bank to reduce the rate. You can also speak with other banks to re-finance your loan at a lower rate. This will reduce the EMI.

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3. Talk to your bank on increasing the loan tenure. This will reduce the monthly burden. For example, if you have to pay a loan of about 7 lakh (Rs 700,000) in 5 years at the rate of 9.5%, your EMI will be about 15,000. If you extend it to for 10 years, your EMI will be a little over Rs 9,000. Your burden is reduced by 45 per cent.

4. Seek the help of family members and friends to provide a temporary relief to the situation.

5. Make your budget more stringent and also take a checklist of your resources and see if you can liquidate any of the assets like gold, shares and other investments to handle at least a few of your EMIs and buy you some time.

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Are there any clauses in the loan agreement that protect you?

Frankly speaking, if you are looking for clauses that can protect your interests even after a default, the answer is no.

Remember, you have taken the loan and you have to pay it back. If you do not pay, bank can take away your assets to recover the loan value.