Loan default and Rights of a borrower

A secured loan is a type of loan backed by security in terms of collateral. Default is the failure to repay this loan, including the amount of interest levied upon it. A default occurs when the borrower is unable to make timely payments, misses or stops making payments under any circumstances. In case of default on repayment of a secured loan, there are consequences. Depending upon the situation, the borrower can talk to the lender to restructure his EMI plan or extend his loan period. However, in extreme cases, the defaulter will lose ownership of his collateral so that the bank can recover the amount lent. If such a thing occurs, RBI has introduced a Fair Practices Code to safeguard the interests of the borrower. Here is a look at four important rights that defaulting borrowers have:

1.Right to adequate notice

This right ensures that you are informed well in advance about possible future action by the lender so that you have adequate time to act on it. If the repayment is overdue by 90 days, the borrower’s account is classified as a Non-Performing Asset (NPA). The lender can start with the next step only once the loan account turns into an NPA. It typically means that the next step takes place only after you have not paid three consecutive EMIs. Banks provide a 60-day notice under the SARFAESI Act before proceeding with securitization action concerning the secured asset. If the borrower fails to repay within a notice period of 60 days, the bank can plough ahead with the sale of assets. But to sell, the bank must serve another 30-day public notice providing details of the sale.

2.Right to fair valuation of assets

The value of an asset kept as collateral is often more than the amount of loan lent. The lender might be interested in getting his percentage of share only and might not realize the proper value of the collateral. However, this is not in the best interest of the borrower as he might suffer a loss in his percentage share. To ensure the borrowers right to fair valuation, RBI has set some guidelines for the valuation of collaterals. As per the SARFAESI Act, before selling the repossessed collateral, the lender needs to get the valuation done from an approved valuer. It ensures that the repossessed collateral is not sold at “any” price. Before the sale of the collateral, lenders are required to issue a notice specifying all the necessary details like the fair value, reserve price, date and time of auction. To check whether the valuation reflects the actual market price, the borrower needs to go through the valuation notice. If the borrower determines that the valuation done by the bank is incorrect or undervalued, then the borrower can contest for a replacement buyer. Despite all these efforts, if a borrower finds that the lender is not doing a fair job, he can further escalate this matter. If a borrower feels that the price has not been set correctly, they are going to approach the Debt Recovery Tribunal to remain the auction and approach the bank with any offers for purchase that the borrower may have.

3.Right to balance proceeds

The lender auctions the collateral to recover his dues. If the sale proceeds are more than the total dues, the borrower is then entitled to receive the balance amount. It is imperative to monitor the auction process to ensure that the money is refunded to the borrower on time. If the lender fails to refund the balance proceeds on time, one can even register their complaint.

4.Right to humane treatment

There is a chance that the recovery agents compel the borrowers to repay their loans. They might harass the borrowers by bothering them at unearthly hours or use muscle power to recover the amount. However, it is crucial to remember that banks are regulated entities that cannot behave like moneylenders while collecting their dues. Their conduct should never violate norms of decency, civil behavior, and ultimately the code of commitment to customers. Customers have a right to be treated with dignity even in case of recovery of a defaulted loan.

Defaulting a secured loan does not make you a criminal. No one can strip you of your rights. If any of your rights are violated, you can raise the matter with the lenders and banking ombudsman offices.