One of the safest loans for banks is home loan because the house itself is used as collateral. But, this also means that if someone with a home loan defaults on scheduled EMI payments for a few months in a row (usually 90 days or 3 EMIs if it is a monthly EMI, and 180 days in case of overdrafts) then the bank can start the process of auctioning the property.
There are several legal steps involved, including RBI regulations on when a home loan can be classified as NPA (non-performing asset) and then auctioned off as per the SARFAESI Act and its guidelines.
Here’s a simpler take on the lengthy legal process:
- 1st: If you consecutively miss the home loan EMIs for 90 days (term loan) and overdraft (180 days), the loan can be classified as non-performing asset (NPA)
- 2nd: Once a home loan is classified as NPA, in accordance with RBI guidelines, the bank is required to serve a notice of 60 days on the borrower to make payment of outstanding liabilities in full.
- 3rd: If the borrower responds to such notice by making any representation or raising any objection, then the bank will communicate within 15 days the reasons for non-acceptance of representation or objection.
- 4th: If the borrower fails to make payment within 30 days (this may further get increased by 15 days
in case the sale does not happen in the first instance), then the secured creditor/ bank is entitled to recover its debt under Section 13(4) of SARFAESI Act by resorting to measures including taking possession of the secured asset including the right to transfer by way of sale of the home.
What preventive steps can home loan borrowers take to prevent NPA classification
Before the SARFAESI act is invoked by the bank, the bank must first classify the home loan as NPA by following the RBI guidelines. Abhishek Chauhan, Counsel, DMD Advocates, shares some preventive measures to avoid NPA classification can be adopted, which are as follows:
a) Immediate communication with bank if faced with financial difficulty
b) Request for restructuring before 90 days lapse
c) Clearing entire overdue amount within 90 days
d) Avoiding repeated dishonouring of EMIs
e) Maintaining contingency reserves.
f) Early intervention significantly reduces risk of recovery proceedings.
Chauhan says: “Therefore, missing three consecutive EMIs in a home loan generally results in classification as NPA if the overdue exceeds 90 days. Partial payment does not automatically prevent NPA unless the account is fully regularised.”
According to Chauhan, upon NPA classification, the secured creditor/ bank is entitled to issue notice under Section 13(2) of the SARFAESI Act, initiating statutory recovery proceedings.
Chauhan says: “Timely corrective action by the borrower is critical to avoid escalation into enforcement and potential auction of the secured property.”
Homebuyers can approach DRT within 45 days
Once your home loan has been classified as NPA and the bank has started acting as per the SARFAESI Act, then you can take certain legal steps before the DRT.
Siddharth Srivastava, Partner at Khaitan & Co, says: “As per Section 17 of SARFAESI, any person including the borrower who is aggrieved by the measures taken by the secured creditor u/s 13(4) of SARFAESI may make an application to jurisdictional Debt Recovery Tribunal (DRT) within 45 days from the date such measure has been taken.”
According to Srivastava, if DRT comes to the conclusion that any of the measures u/s 13(4) of SARFAESI, taken by the secured creditor violate provisions of SARFAESI and the rules, and require restoration of the management or possession of the secured assets to the borrower or other aggrieved person, it may pass suitable orders including declaring such sales exercise by secured creditor as invalid and restore the possession or management of the secured asset to the borrower or such aggrieved person.
Srivastava says: “It (DRT) may also order compensation and costs to be paid to the borrower, as per Section 19 of SARFAESI.”
This order by DRT can be further appealed to the Debt Recovery Appellate Tribunal (DRAT) within 30 days from the date of receipt of order passed by DRT.
When is home loan classified as NPA?
Srivastava from Khaitan & Co says that classification of a loan or advance by a commercial bank to any person including an individual is done in terms of the Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 (RBI IRAC Norms) and on satisfaction of any one of certain conditions, as listed down at Para 42 of the RBI IRAC Norms.
When it comes to home loans, there are certain conditions under which a bank can classify a loan or advance as NPA are as follows-
- Interest and / or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan;
- The account remains ‘out of order’ in respect of an Overdraft / Cash Credit (OD/CC); and an account where the regular / ad hoc credit limits have not been reviewed / renewed within 180 days from the due date / date of ad hoc sanction.
Srivastava points out that when it comes to a home loan, where you pay interest only after principal is recovered, interest need not be considered as overdue from the first quarter onwards. These loans / advances should be classified as NPA only if there is a failure to repay the principal installment or to pay the interest on due dates.
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