Owning a house or a car is a dream come true for many because of the availability of loans. In the last few years with an increase in standard of living particularly in the metros, the once conservative and loan averse investor is now willing take on loan commitments to satisfy even leisure requirements.
Taking a loan has an impact on your cash flows by way of EMI payments. What happens to all your loan commitments, if you have lost your job or are entangled in a debt trap because of too many commitments? Default becomes imminent. A default occurs when a customer repeatedly fails to make payments to the lender as per the schedule outlined by the 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?
When you find that you are in a situation where you will not be able to meet your loan obligations, running away from the lender is the last thing you should do.Banks/lending institutions understand that there could be genuine reasons for which the borrower is unable to make timely payments such as loss of job, or an accident that may have confined the borrower to the bed. This is especially true if you have always paid your EMIs on time, every time before events took an unfortunate turn.
You need to engage in a dialogue with the bank/financial institution. Based on how genuine your intent and case is, the bank may look for various feasible solutions that is mutually acceptable. The borrower will benefit because hewill be able to retain his asset and the bank will also benefit because thisagreement will prevent an addition to its NPA portfolio.
Thevarious options that can be worked out include:
- · Reschedule your debt: After having analyzed your financial position, if the bankfeels that the quantum of EMI is what is troubling you, they may be willing toreschedule your debt by extending the loan tenure. That will bring down themonthly EMI commitment, though it will mean more interest outgo in the longterm. However, you should consider the immediate relief it can bring to yourcurrent situation. When the tide turns and you are facing better times you cantry negotiating with your bank and revert to your old or higher EMI or evenprepay your loan, closing it early and saving excessive interest outgo if itmakes sense post the pre-payment penalty.
- · Deferring the payment: If your financial situation is such that there islikely to be a jump in cash flow going forward because of change in job or anyother reason, you may seek temporary relief from the bank for a few months. Thebank may permit the same but may charge penalty for not paying within the timeframes agreed upon earlier.
- · Restructuring the loan: In case of housing loans, banks have a provision forrestructuring the loan e.g. terms of extending the tenure of the loan. For thesame, the bank must perceive the reason of default to be genuine. The ReserveBank of India (RBI) has issued guidelines on the same. For. e.g. the loantenure can be increased by not more than 1 year in most cases. Foreclosure byselling the collaterals with the borrower's co-operation is also advised as thenext step.
- · One timesettlement: If you express your desire to pay back, and make known tothe bank your current financial condition, banks may be willing to enter into aone time settlement on a case to case basis. This is a good way to get rid ofyour loan if you have some money as usually the settlement will be done at alesser value i.e. the bank may waive off some amount/charges. If your financialsituation is really bad, then you may need to file for bankruptcy to freeyourself from the loan commitment.
- · Conversion ofloan in case of unsecured loans: Banks tend to be stricter as faras unsecured loans are concerned. The borrower could opt for converting theunsecured loan to a secured one by offering a security. That should bring downthe rate of interest and thus the EMI burden.
Running away from the problem isnot the solution. Not only will you undergo emotional stress, you will also endup losing your asset. What is important is that your intent to pay off the loanshould be evident to the lender. It is in the banks interest too, to ensurethat the loan doesn’t turn bad. So be wise and engage in a dialogue with thebank the moment you figure out that you will not be able to meet obligationsand don’t wait till the last moment. That should help you tide over thetemporary crisis you could find yourself in.
What happens if none of the aboveoptions work out?
Ifnone of the above options work, the bank after giving you time for repaymentwill go in for repossession of the asset for the purpose of recovery of dues.
Movable asset (Car/Auto)
- Borrower will be given a notice of7-15 days to pay the dues before the repossession of the Vehicle. In case ofnon payment within this notice period, the Bank will repossess the pledgedvehicle..
- 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 the outstanding dues. The Pre Sale Notice would clearly mention the details of the concerned office and the corresponding contact person for payment and release of 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 realization of the 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 (House/property/land)
A notice will be sent to theborrower u/s 13(2) of the SARFAESI Act. This can be done only after the loan isclassified as NPA as per the guidelines set by RBI
- The customer will be allowed 60days post issuance of the notice to regularize the account or come forward tosettle the account. .
- If the borrower refuses to pay,then the authorized officer will ask for the physical possession of themortgaged property by handing over the demand possession notice to the borrower
- The Bank shall proceed with theauction of the attached property post 30 days of taking possession of theproperty, in the event, that the customer does not come forward and settle theloan. The Bank shall send the customer a letter intimating him, of the venue ofthe sale indicating date and time of the same.
- The bank will consider handingover possession of property to the borrower any time after repossession andbefore concluding sale transaction of the property, provided the bank dues arecleared in full.
Any excess amount obtained afteradjusting the dues on the loan will be refunded to the borrower.
TheSARFAESI act gives the customer the right to appeal against the action ofrepossession taken by the bank in the Debt Recovery Tribunal u/s 17 within 45days from the date when the action was taken. If the DRT passes an orderagainst the borrower, then an appeal can be filed before the Appellate Tribunalwithin 30 days of receiving it. If it is held in appeal that the possession ofthe asset taken by the secured creditor was wrongful, the Tribunal or theAppellate Tribunal may direct its return to the borrower, along withappropriate compensation and cost.
Loan default can have serious consequences. Not only could itresult in seizure and auction of your assets, but your credit score too willtake a beating. Even rescheduling debt tarnishes your credit history to anextent and will reflect in your credit score. Obtaining a loan in the futurewill become an issue which is a huge financial setback. Make sure you take aloan only if you’re sure of timely repayment. A good way to do this is toascertain your personal net worth in terms of assets you own and the money youhave at your disposal after taking stock of your existing debts and otherfinancial commitments.