An unsecured loan offers no security to the lender and hence there is no immediate threat to the borrower on the lenders having a claim on their assets. “An unsecured loan is without any collateral or mortgage as security for repayment and only based on the credit rating of the borrowers. Therefore, the assets cannot be appropriated. The recovery is based on the duration of the dispute resolution contract and through the court process,” says Harsh Pathak, a Delhi-based lawyer.
This means that the lender itself has no right to own any of your assets. “The assets of a borrower may only be seized by following due process and by a court order on the assets that the court deems appropriate. The assets of the borrower are beyond the net recovery of the lender and do not come only for the realization of the debt in accordance with the assessment and order of the competent court,” adds Pathak.
Here is an overview of how the lender will recover dues from a borrower who has defaulted on a personal loan and the options available with such a defaulting borrower.
Mastery of damage in the first instance
Lenders usually get serious about collection when there is a long delay in loan repayment. “The borrower’s account is classified as a non-performing asset (NPA) if repayment is 90 days overdue,” says Sonam Chandwani, managing partner at KS Legal & Associates. The lender will take legal action once your loan account turns into an NPA, i.e. only after you fail to pay three consecutive EMIs. The lender will give you 60 days notice to pay the dues before starting the legal process. This is the time when you should do your best to fix the fault.
“Initially, if the borrowers can convince the lender that the defaults are temporary and the repayment would soon become regular, the lender can delay the legal proceedings. Therefore, clear and honest communication with the lender can block or at all least delay the procedures initiated by the lender, if necessary,” says Chandwani.
The lender can offset the debt with the banker’s lien
There are many unsecured loans where the asset is not mortgaged but only a lien is marked on the assets like safe custody, bonds, fixed deposits, stocks, mutual funds etc. . Once a lien is marked, the borrower cannot sell the assets until the assessments are cleared and the lender removes the lien.
So what if the borrower defaults and is unable to pay the dues?
“The lender may have a right to exercise the bank lien and a right of set-off if contractually agreed by the borrower. The banker’s lien is the right to keep assets delivered into the possession of the bank unless the borrower to whom they belonged has agreed that this right should be excluded, as in the case of valuables kept in the bank for safe custody,” says partner Manisha Shroff. , Khaitan & Co.
A bank may exercise the option to deduct the contributions from your deposits. “A lender also has the right to offset a debt owed by a borrower with a debt owed by him. For example, a bank may deduct monies owed by the borrower from money deposited by the borrower in the bank’s accounts, if contractually agreed,” says Shroff.
If you have fixed deposits or a savings account with a bank, in such a situation the bank can recover the dues on these deposits.
Lender takes legal action to recover money
Under normal circumstances, the lender has no right to the borrower’s property, but if the lender takes legal action and obtains a favorable order, things can change. “A short action or summary proceeding is available for the recovery of money under the Code of Civil Procedure of 1908, through the institution of a suit in a court of competent jurisdiction,” says Shroff.
The jurisdiction of the prosecution is determined first on the basis of territorial jurisdiction, then on the basis of pecuniary jurisdiction. The monetary value (total dues claimed by the lender) of the lawsuit becomes a deciding factor in determining whether the lender will file the lawsuit either in the district court or in the high court.
“Where the lender obtains a judgment from a court against the borrower, he must obtain the judgment satisfied by way of enforcement proceedings. Enforcement ends when the judgment creditor or holder of the decree receives money or something else granted to him by judgment, decree or order,” Shroff explains.Also at this stage, the borrower can get a last chance to settle the loan without involving the seizure of any assets.
However, if the borrower is unable to pay the dues, he risks seeing his assets seized. “In the event that the borrower is unable to comply with the court order, the court may, at the request of the lender, seize the borrower’s assets,” says Shroff.
Lender can approach debt recovery court for loan above Rs 20 lakh
A lender may initiate collection charges by applying to the Debt Recovery Tribunal (DRT) under the Banks and Financial Institutions Debt Recovery Act 1993 (DRT Act). This option is only available for high outstanding value as the debt amount should not be less than Rs 20 lakh as per DRT law.
“The DRT Act is not applicable when the amount of debt due is less than Rs 20 lakh or any other amount not less than Rs 1 lakh, in cases where the central government may specify by notification. So, in essence, the minimum debt to be collected from DRT should not be less than Rs 20 lakh,” says Shroff.
The borrower also has the opportunity to be heard and present their facts in court which can be reviewed by the court before making a final order. “At the end of the procedure under the DRT, if the DRT deems it appropriate, it may order the appointment of a receiver of the property/assets of the borrower, before or after the granting of the Recovery Certificate (RC) or appoint a commissioner to recover defendant/defendant’s property or sale,” Shroff adds.
After going through the history of the file and presenting the facts if the court passes the order for seizure of assets, then the DRT collection office can proceed with the seizure and sale of the borrower’s assets.
Rights of a defaulting borrower
A borrower who defaults on an unsecured loan may exercise the following rights: right to adequate notice, right to be heard, right to humane treatment and right to report a grievance.
“In addition to other contractual rights an individual borrower may have under the loan agreement, the Reserve Bank of India (“RBI”) has formulated
Code of Fair Practices (“FPC”) to streamline loan collection practices for banks and financial institutions,” says Shroff.
Banks cannot engage in misconduct or circumvent the procedure provided by law against defaulters. “In the event of fault by the banks, NBFCs, CRAs, the defaulter will have legal rights against them. In the event of harassment or coercion by the bank or the collection agents, the borrower can seize the banking within the relevant framework of the RBI. In case of continued harassment, a complaint to the police can also be filed or an injunction can be filed in the civil court,” Chandwani explains.
If the lender has filed a lawsuit in court or a DRT, you must follow the procedure and defend your case. “In the case of an unsecured loan, lenders generally try to obtain an injunction on the sale or disposition of all assets. However, banks cannot sell all assets; they can only sell assets that would be sufficient to realize the outstanding loan amount plus interest, costs and expenses, etc. says Mani Gupta, partner at Sarthak Advocates & Solicitors.
If the case has turned against you before the court or the DRT, you must ensure that its impact is limited. “If the borrower has an asset the sale of which would generate sufficient proceeds to discharge the liability, the borrower should notify the DRT/court and request that the injunction be limited to that asset. Other than that , certain types of goods cannot be sold under the decree,” Gupta adds.
Be proactive in paying dues
A serious default, where the lender has to write off a large outstanding amount from your loan, can have a serious impact on your credit history. With a bad credit history, the borrower is almost unlikely to get credit in the future. Even if you pay the dues later, it will still be reflected in your credit history and it will take many years to improve your credit score.
However, it may be difficult and time-consuming for the lender to obtain a claim against the borrower’s asset to recover the unsecured loan owed, however, if this occurs the cost to the borrower will be far greater than the amount owed as a lender. will recover not only the principal, but also interest, penalties and the cost of legal action.
“The borrower must be proactive in settling the loan, otherwise it costs penalty interest, adverse credit score, late fees and legal action. As civil cases are common and permitted in default cases. However , in exceptional circumstances, criminal charges for breach of trust or cheating may also arise,” says Pathak, so the best way is to be proactive and take tough calls to liquidate your own assets and pay dues to the good time at a lower cost.