This Article is From Jul 04, 2013

Why a loan default is not the end of the road

Why a loan default is not the end of the road

Today, many dreams like owning a house or a car come to life because of the availability of loans. With an increase in the standard of living in the last few years - particularly in metro cities - the once conservative and loan-averse investor is now willing to take on loan commitments to satisfy even leisure requirements.

Taking a loan impacts one's cash flows by way of EMI payments. Now, the question is- what happens to your loan commitments, in case you lose your job or get caught up in a debt because of too many commitments?

A default occurs when a customer repeatedly fails to make loan repayments as per the schedule outlined by a lender at the time of giving the loan. Does a default mean that you need to give up ownership of the asset for which the loan was taken? Running away from the lender is the last thing you should do on finding that you will not be able to meet your loan obligations. Banks/lending institutions do give an ear to genuine reasons which keep borrowers from making timely payments. Loss of a job or an accident are examples of such reasons which can actually restrain the borrower from paying due amounts. This is especially true if you have been making timely payments of your EMIs without a fail.

In such a case, you need to engage in a dialogue with your bank/financial institution. Based on how genuine your case and intent is, banks may look for various feasible solutions that are mutually acceptable. Borrowers benefit as they get to retain the purchased assets acquired and banks also benefit because this agreement prevents an addition to their NPA (non-performing asset) portfolios.

Here are a few options one can consider in case he/she is unable to pay loan EMIs:

Debt rescheduling: After having analysed your financial position, if the bank feels that the quantum of EMI is what is troubling you, it may decide to have your debt rescheduled by extending the loan tenure. This will bring down the monthly EMI commitment though it will mean more interest outgo in the long term. However, you should consider the immediate relief it can bring to your current situation. When the tide turns and you are facing better times you can try negotiating with your bank and revert to your old EMI amount or pay a higher EMI amount. You can even prepay your loan, closing it early and saving excessive interest outgo, if it makes sense after the pre-payment penalty.

Deferring the payment: If your financial situation is such that there is likely to be a jump in cash flow going forward because of a change in job or any other reason, you may want to seek temporary relief for a few months from your bank. A bank may permit the same but may also charge penalty for not paying within the time frame agreed upon earlier.

Loan restructuring: In case of housing loans, banks have a provision for restructuring. The tenure of a loan can be extended, for example. Here, the bank must perceive a genuine reason of default. The Reserve Bank of India (RBI) has issued guidelines on the same. For, example the loan tenure can be increased by not more than 1 year in most cases. Foreclosure by selling the collaterals with the borrower's co-operation is also advised as the next step.

One time settlement: If you express your desire to pay back and make known to the bank your current financial condition, the lender may be willing to enter into a one-time settlement on a case to case basis. This is a good way to get rid of your loan if you have some money as usually such settlement will be done at a lesser value, that is, the bank may waive off some amount/charges. If your financial situation is really bad, you may need to file for bankruptcy to free yourself from the loan commitment.

Loan conversion in case of unsecured loans: Banks tend to be stricter as far as unsecured loans are concerned. A borrower can, however, opt for converting an unsecured loan to a secured one by offering a security, which should bring down the rate of interest and thus the EMI burden.

Running away from the problem is not a solution. Not only will you undergo emotional stress, you will also end up losing your asset. What is important is that you intend to pay off the loan should be evident to the lender. It is in the interest of banks too, to ensure that their loans don't turn bad. So be wise and engage in a dialogue with your bank the moment you figure out that you will not be able to meet obligations. This should help you tide over the temporary crisis you may find yourself trapped in.

If nothing works out

If none of the above options work, the bank will go in for repossession of the asset for the purpose of recovery of dues after giving you time for repayment.

Here are two types of assets and what happens when banks decide to repossess them:

Movable asset: The borrower is given a notice of 7-15 days to pay the dues before the repossession commences. In case of non-payment within this notice period, the bank will repossess the pledged vehicle. After repossession of the vehicle, a pre-sale notice would be issued to the borrower giving him a time line of 7 days to make payment of outstanding dues. The pre-sale notice would clearly mention details of the concerned office and the corresponding contact person for payment and release of the vehicle.

In case the borrower makes the payment in accordance with the agreed terms of settlement, the vehicle will be released back to the borrower within 7 days from the realisation of payment.

The vehicle will be sold by way of auction through dealers empaneled with the bank within 90 days from the date of repossession.

Immovable asset: A notice will be sent to the borrower under Section 13(2) of the SARFAESI Act. This can e done only after the loan is classified as NPA as per the RBI-given guidelines. The customer will be allowed 60 days post issuance of the notice to regularize the account or come forward to settle the account. If the borrower refuses to pay, then the authorized officer will ask for the physical possession of the mortgaged property by handing over the demand possession notice to the borrower.

The bank shall proceed with the auction of the attached property post 30 days of taking possession of the property, in the event, that the customer does not come forward and settle the loan. The bank shall send the customer a letter intimating him, of the venue of the sale indicating date and time of the same.

The bank will consider handing over possession of property to the borrower any time after repossession and before concluding sale transaction of the property, provided the bank dues are cleared in full. Any excess amount obtained after adjusting the dues on the loan will be refunded to the borrower.

Rights of the borrower

The SARFAESI Act gives the customer the right to appeal against an action of repossession taken by a bank in the Debt Recovery Tribunal under Section 17 within 45 days from the date when the action was taken. If the DRT passes an order against the borrower, then an appeal can be filed before the Appellate Tribunal within 30 days of receiving the same. If it is held in appeal that the possession of the asset taken by the secured creditor was wrongful, the Tribunal or the Appellate Tribunal may direct its return to the borrower, along with appropriate compensation and cost.

Loan default can have serious consequences. Not only could it result in seizure and auction of your assets, but your credit score too will take a beating. Even rescheduling debt tarnishes your credit history to an extent and will reflect in your credit score. Obtaining a loan in the future will become an issue which is a huge financial setback. Make sure you take a loan only if you're sure of timely repayment. A good way to do this is to ascertain your personal net worth in terms of assets you own and the money you have at your disposal after taking stock of your existing debts and other financial commitments.

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