Rights of loan defaulters: Right to adequate notice, Right to fair valuation of assets, Right to be heard

A loan default is a civil offence and not a criminal offence. Even after default, the borrower has certain rights, and the bank has to respect those rights.

Did you know that borrowers have certain rights even after a loan default

Due to certain circumstances such as job loss, accidental disability, or other reasons, some people lose their income and are unable to repay their loans. In such cases, the bank tries to recover the loan, and if not successful, it eventually takes steps to repossess the asset. Even if one has defaulted on a loan, they have some defaulter rights. The bank has to follow a certain recovery procedure and make sure they respect the defaulter’s rights. 

Here are the legal rights of loan defaulters

1. Right to adequate notice

If you miss paying your EMI, the bank will follow up through call, SMS, email, etc. When you don't pay your loan EMI for 90 days (or 3 consecutive EMIs), the bank will classify your account as a Non-Performing Asset (NPA). Once the loan has been classified as an NPA, the bank will start the legal proceedings for repossession of the asset. 

The bank has to send a 60-day notice as per the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act. If the borrower does not pay up during the 60-day notice, the bank will issue another 30-day public notice announcing the sale of the asset. Even during this period, they can make a partial payment and request the bank to give more time to repay the remaining amount.

If the borrower hasn’t paid up even when the 30-day notice period has passed, the bank will go ahead with the sale of the asset. In other words, a defaulter gets adequate notice to repay the loan before the bank proceeds to sell their asset.

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2. Right to be heard

During the 60-day notice period, a borrower has the right to raise any objections with the bank related to the repossession of the property. An authorised officer from the bank has to respond to your objections within 7 days and inform you whether your objections have been accepted or rejected, with valid reasons.

3. Right to fair valuation of assets

If the borrower doesn't pay up despite all the notices, the bank will proceed with getting the asset valued fairly for sale. As per the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, the bank has to get the asset valued from an approved valuer before it can sell it. 

The bank has to share the asset valuation report and related details (such as the date and time of the auction) with the borrower. If the borrower notices any discrepancy in the valuation of the asset, they can raise it with the bank. The provisions related to the fair valuation of assets ensure that the borrower does not suffer a loss during the sale of the asset.

4. Right to getting balance proceeds

Sometimes, the bank may recover more money from the auction than the outstanding loan amount. In such cases, the bank has to retain the outstanding loan amount and return the remaining excess amount to the borrower in a timely manner.

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5. Right to be treated humanely

During the entire loan recovery process, the bank has to follow the Fair Practices Code. It must ensure that the recovery agent doesn’t resort to any coercive practices or harassment to recover the money. The recovery agent needs to respect the borrower's privacy, and contact them only during the daytime, and behave in a civilised manner at all times.

Last words

Unfavourable circumstances may force a borrower to default on their loan obligation. But a borrower needs to realise that a loan default is a civil offence and not a criminal offence. Even though they may have defaulted, as per the rights of loan defaulters, they still have the right to be treated with respect, the right to be heard, the right to adequate notice for repossession of the asset, and the right to get any excess amount from the sale proceeds.

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