There are mainly two types of loans, namely, secured loans and unsecured loans. Secured loans are loans backed by collateral. These include mortgages, car loans, etc. wherein the collateral is your home or your car. Alternatively, unsecured loans do not require a collateral, though you are still charged interest and sometimes fee. These include personal loans such as credit cards, student loans, etc. Since there is no collateral involved, financial institutions give out unsecured loans based on your credit score and history of repayment of dues.
Since an unsecured loan is without a collateral, legally assets of a borrower can only be attached following the due process of law through a court order, whereby the court may attach whatever asset it may deem fit. The process of recovery of debt and attachment of property undertaken by lenders is as follows.
Firstly, in case of a prolonged delay on repayment of loan the lender will typically resort to phone calls and messages reminding the borrower of their dues, and may resort to involving loan recovery agents. Typically, if the dues remain unpaid for a period of over 90 days the account of the borrower is classified as a Non-Performing Asset (NPA). This is a pre-step before initiation of legal proceedings against the borrower. Ideally, the bank will provide the borrower a legal notice for clearance of dues 60-days before initiating legal proceedings.
Secondly, if dues are not cleared within 60-days of the legal notice, the lender has the option of filing a suit under the relevant jurisdiction for recovery of dues. The court may, if satisfied, attach the property of the borrower if he/she is unable to settle the dues within a prescribed time.
The jurisdiction is determined based on the territorial jurisdiction and pecuniary valuation of the suit. The pecuniary value (or the amount due with interest) becomes a determining factor as to whether the suit will be instituted in the District Court or the High Court.
Alternatively, if the dues exceed an amount of Rs. 20,00,000/- (Twenty Lacs Only), the borrower has an option to invoke the jurisdiction of the Debt Recovery Tribunal under the Recovery of Debt Due to Banks and Financial Institutions Act, 1993.
Defaulting Borrower’s Rights
Being a defaulter in payments does not however preclude the borrower from fundamental rights. These include right to be heard, right to humane treatment, right to sufficient notice, right to report grievance, etc. During the process of recovery, the lenders must also observe the Fair Practice Code instituted by the Reserve Bank of India (RBI) to streamline loan recovery practices.
Furthermore, the lenders practice to employ musclemen to threaten and harass the borrowers have been held wholly illegal by the judiciary on more than one occasions.
If the lender has brought the legal processes to a court or DRT, it is advisable that the borrower must attend and represent his cause. In the case of an unsecured debt, lenders generally seek an injunction prohibiting the sale or disposal of any and all assets. Banks, on the other hand, cannot sell all of their assets; they may only sell those assets that are adequate to recover the amount of the defaulted loan plus interest.
Borrowers must be proactive in repaying their loans; otherwise, they may incur penalties, a negative credit rating, late fees, and legal proceedings. Civil lawsuits are prevalent and allowable in default circumstances. Criminal proceedings for breach of trust or dishonesty might, however, be filed in rare situations.