To safeguard the interest of the borrowers RBI has introduced a Fair Practices Code. The right to humane treatment requires that borrowers be treated with dignity.
In case of default on repayment of a secured loan like a home or car loan, the biggest worry of a borrower is that they would have to part with the financed asset like the house, car etc. However, borrowers should know that even upon default, they have certain basic rights which cannot be overlooked by the lender.
Here is a look at 4 important rights that defaulting borrowers have.
Right to adequate notice
It is not a criminal offence to default on loan repayment. “Loan default is generally a civil wrong, except in cases where there is fraudulent or dishonest intention on the part of the borrower at the time of availing the loan,” says Mani Gupta, Partner at Sarthak Advocates & Solicitors.
A right to adequate notice makes sure that you are informed about a possible future action by the lender well in advance so that you have time to act on it. “Typically, banks and financial institutions give a 60-day notice under the SARFAESI Act before proceeding with securitisation action in respect of the secured asset,” adds Gupta.
However, you should also note that the lenders do not act in this direction on the very first monthly repayment default. “The borrower’s account is classified as a non-performing asset (NPA) if the repayment is overdue by 90 days,” says Sonam Chandwani, Managing Partner at KS Legal & Associates. The lender will start proceeding only once your loan account turns into an NPA, which means only after you have not paid 3 consecutive EMIs.
“In the event of the borrower’s failure to repay within the notice period (i.e., 60 days), the bank can go ahead with the sale of assets but in order to sell, the bank has to serve another 30-day public notice mentioning details of the sale,” adds Chandwani.
In case you can make some payment within this period then you will get some breathing space to plan your future course of action. You can go for a one time settlement with the lender, or you can get your loan restructured as per your affordability.
Right to fair valuation of assets
The value of the property is often much more than the total dues of the lender. However, the lender may only be interested in realising as much value so that the dues are recovered, which may not be in the best interest of the borrower. To ensure borrower’s right to fair valuation, RBI has set guidelines for valuation of collaterals. As per the SARFAESI Act, before selling the repossessed asset, the lender needs to get the valuation done from an approved valuer.
“In compliance with these guidelines, most banks have prescribed detailed criterion for empanelment of valuers and generally only these valuers are used. This ensures that the repossessed asset is not sold at any price – unilaterally determined by the bank,” says Gupta.
Lenders are required to give advance notice and full details to the borrower. “Prior to the sale of assets, lenders are required to issue a notice specifying the fair value of the asset, including details such as the reserve price, date and the time of auction,” says Chandwani.
The borrower should go through the valuation notice thoroughly to check if the valuation is reflecting the true market value of the asset. “In the event the borrower determines the valuation by the bank to be incorrect or undervalued, then the borrower can contest the current auction and look for a new buyer and introduce them to the lender,” suggests Chandwani.
Despite all these efforts if a borrower finds the lender not doing a fair job, he can escalate the matter. “If a borrower feels that the price has not been set correctly, they can approach the Debt Recovery Tribunal for stay on the auction and also approach the bank with any offers for purchase that the borrower may have,” advises Gupta.
Right to balance proceeds
When the security for a loan is auctioned by the lender to recover the dues, and if the sale proceeds are more than the total dues, a borrower is entitled to receive the balance amount.
“Even if a borrower’s asset is repossessed, it is imperative to monitor the auction process. The reason being lenders tend to refund any excess amount realized after recovering their dues from the auction. Therefore, the borrower must ensure that the money is refunded to the borrower in a timely manner,” advises Chandwani.
If the lender fails to refund the balance proceeds on time you will need to register your complaint. “The borrower may approach the Debt Recovery Tribunal for assistance in recovery of the balance proceeds. A borrower can also approach the Banking Ombudsman to complain about the unfair dealing by the bank in this regard,” suggests Gupta.
Right to humane treatment
Lenders are required to follow the due process prescribed by the law. “Lenders frequently engage recovery agents to coerce borrowers to repay their loans, however; their conduct should never violate norms of decency, civil behavior, and ultimately the code of commitment to customers signed by the banks,” says Chandwani.
To safeguard the interest of the borrowers RBI has introduced a Fair Practices Code. The right to humane treatment requires that borrowers be treated with dignity. “Lenders should not resort to undue harassment like persistently bothering the borrowers at odd hours or use of muscle power for recovery of loans. Guidelines also require that lenders should restrain from interference in the affairs of the borrowers except for what is provided in the terms and conditions of the loan sanction documents,” says Gupta.
“In case of violations, borrowers or their family members can raise the matter with the lenders and banking ombudsman offices,” suggests Chandwani.