When the borrower fails to pay the EMIs or repay the loan, the bank or the lending institution conducts a recovery process. In many cases, the benefits or borrower could be affected, or banks could not get their money back. Therefore RBI came up with its guidelines to ensure a healthy recovery process for both parties. In this article, we will look at bank loan recovery and its process with different scenarios. So, if you are looking to know more about the back loan recovery process, then keep reading this article.
What is Bank Loan Recovery?
A bank loan recovery is an essential process for the bank and the financial institutions offering loans. And they conduct this process due to many reasons. However, one of the most common reasons is when their customer or borrower fails to repay the EMI and the rest of the loan amount to the bank. During the recovery process, the bank can include the debt or loan recovering team. Also, they can hire a recovery agency, sell out the securities of borrowers held by the bank and take legal actions in court.
Bank Loan Recovery Process in India
Now, you may have learned some basics of the loan recovery process. Let’s dig it deeper and understand the ways banks use in different scenarios.
Case 1: Suppose Mr. A is the bank’s borrower and was unable to pay the remaining loan amount as he lost his job due to COVID-19.
So, in this case, the bank can treat him as a genuine defaulter and try to get their money back accordingly. Below are some of the ways that banks can use to get money from Mr. A.
The bank can extend the loan repayment tenure so as to reduce the burden of the EMI amount.
Banks can also use a moratorium if the borrower can not repay in a few months. Here he will not have to pay the loan amount for a few months.
If the borrower is unable to pay for many months and his financial condition is not going well. Then the bank can use the “haircut” technique. The bank waives some portion of the loan amount if the borrower can not pay shortly, negatively impacting the CIBIL score. Therefore, the borrower should repay the amount by extending the tenure and reducing the EMI amount.
Case 2: Mr. Y is another borrower, but his credit score is poor, and he claimed the loan even though he was unsure about the repayment of the loan. The Concerned bank offered him a quick loan with a high-interest rate by seeing his credit score, and now he failed to pay the remaining loan amount.
In this case, the bank can not waive off or use a haircut for Mr. Y because his credit score is not good. If he got the loan, then he might have given collateral security to the bank. So, here the bank can recover the money by selling out this security; however, the excess amount will be given to Mr. Y if his asset is worth more than the loan amount. But if this option does not work, the bank can appoint a recovery team and even take legal action if needed.
What Are RBI Guidelines For Loan Recovery Agents?
There are some crucial RBI guidelines about loan recovery agents, which you should know if you are a borrower.
- The banks should use a diligence process while hiring recovery agents, and they should be responsible for their complaints.
- Before banks allow recovery agents to meet up with defaulters, banks must inform the defaulters. Also, the recovery agents should carry the authorization letter and bank’s notice with them so that the defaulter can understand what the bank has sent them.
- If the defaulter has a complaint, the recovery agents must stop their process until the solution comes.
- Banks are also responsible for the solutions of the complaints by borrowers or defaulters.
Can Borrower Go To Jail If Bank Recovers a Loan From Judicial Process?
Loan defaulting is not the kind of crime, and hence the defaulter can not be arrested, except for specific conditions. Although the bank has the right to file the complaint against the civil court and run their case in civil court. However, if the borrower is a wilful defaulter, he can be arrested, and his bank can file a case in criminal court. The defaulter can be a wilful defaulter if he could pay the money but did not pay, transferring the collateral security without letting the lender know. In these exceptional cases, the banks are allowed to treat the defaulter as a wilful defaulter and run cases in criminal court where the borrower can get arrested.
What Are Rights of Borrower?
The borrower has some fundamental rights given by law, and lenders are obligated to follow the recovery process legally. If the bank has collateral security of the borrower and mentioned in the agreement. Then the bank can get these securities under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, also known as SARFAESI Act.
The borrower has the right to get noticed, the right to be heard, the right to get treated politely, and the right to fair value. And all these rights can be availed by the borrower. If he misses some of these, then he can complain about the recovery agents or banks.
How Does Bank Recover Loan Amount After Death of Borrower?
When the unfortunate demise of the principal borrower of the bank happened. In that case, the liability to pay the principal amount can get transferred to the legal heirs of the co-applicants. As it was mentioned when applying for the loan. In some cases, borrowers’ insurance policies can fill the loan money for the banks on behalf of the borrower.
In this article, we learned what the bank loan recovery process is, the guidelines of RBI for recovery agents, and the process banks use to recover the loan amount. So I hope now these concepts are clear to you. If you have any questions to ask about the loan recovery, then you can ask in the comment box.