Unable to repay loan? Legal rights, viable steps that defaulters must follow

Recently the Reserve Bank of India (RBI) issued a warning note highlighting the risks associated with retail unsecured loans. Validating the RBI’s concerns, The Credit Information Bureau (India) Limited (CIBIL) report also shows that for the quarter that ended December 2022, personal loans and credit cards, which are largely unsecured, rose the sharpest. But what’s more alarming is that delinquency in this category has risen for personal loans compared to pre-COVID levels. Now the burning question of the hour -What do you do next if you are a defaulter? This can be a very stressful experience for many people who don’t know how to handle harassment from loan recovery agents.

Being a defaulter can negatively impact credit health, leading to lower credit scores and higher interest rates. Banks should handle default cases with empathy and offer personalized solutions. Defaulter's legal rights include receiving notice, fair debt collection practices, grievance redressal, seeking legal assistance, and fair credit reporting.

Livemint spoke to experts from Credgenics and CLXNs regarding a rise in the number of defaults in the retail loan category.

Manavjeet Singh, MD & CEO, CLXNS)

1)Have RBI guidelines brought any sigh of relief in the hearts of defaulters?

The RBI guidelines have definitely brought some relief to defaulters. They allow defaulters to restructure their loans and make smaller payments, which can help them get back on their feet financially. The guidelines also provide for a longer repayment period, which can make it easier for defaulters to manage their debt.

For example, let's say you have a loan of 10 lakhs that you are unable to repay. Under the RBI guidelines, you could restructure the loan so that you only have to pay 5 lakhs now, and the remaining 5 lakhs would be repaid over a longer period of time. This could make it much easier for you to manage your debt and get back on track financially.

2) Does being a defaulter impact your credit health, how?

Being a defaulter can have a significant impact on your credit health. Your credit score will likely decrease, which can make it more difficult to get approved for loans in the future. You may also have to pay higher interest rates on loans. This is because lenders use your credit score to assess your risk as a borrower. If you have a low credit score, lenders will see you as a higher risk and may be less likely to lend to you.

Let's say you have a credit score of 750. This is considered a good credit score, and you'll likely be able to get approved for loans with relatively low-interest rates. However, if your credit score drops to 600, you'll be considered a riskier borrower and may have to pay higher interest rates on loans.

3) Any advice to banks when it comes to handling default cases?

When it comes to handling default cases, we would advise banks to approach the situation with empathy and understanding. It's important to recognize that individuals may face financial challenges or unforeseen circumstances that lead to defaults. Rather than adopting a confrontational approach, banks can strive to create an open and supportive environment.

Encouraging open lines of communication and offering personalized solutions can make a significant difference. By working closely with defaulters, banks can explore options such as flexible repayment plans or debt restructuring, tailored to their financial capabilities. Taking a compassionate approach can not only facilitate better debt recovery but also help individuals regain their financial stability and rebuild their credit health.

Mayank Khera, Co-Founder & COO, Credgenics

4) What are the most viable steps that the defaulter should follow?

When facing a default on a retail loan, it is crucial for the defaulter to take immediate action to address the situation. Here are some viable steps that a defaulter should consider following:

● Assess the Situation:

● Communicate with the Lender

● Evaluate Financial Situation

● Negotiate a Repayment Plan

● Seek Professional Assistance

● Prioritize Payments

● Protect Credit Score

● Explore Debt Restructuring or Settlement

As every situation is unique, the steps to address a retail loan default may vary based on individual circumstances and the lender's policies. It is crucial to consult with the lender and seek professional advice to navigate through the process effectively.

5) What are the legal rights of the defaulters?

In India, the legal rights of defaulters are widely protected by legislation and regulatory frameworks. In a recent communication, The Reserve Bank of India (RBI) directed banks and finance companies to undertake compromise settlements or technical write-offs on accounts categorized as wilful defaulters or fraud. This implies that a wilful offender or a company involved in fraud will no longer face prejudice by lenders, on account of criminal proceedings against them. Additionally, borrowers who had undergone compromise settlements now have the opportunity to apply for fresh loans after a minimum cooling period of at least 12 months. It’s worth noting that regulated banks and finance companies have the flexibility to stipulate higher cooling periods in line with their board-approved policies.

Here are some of the legal rights that a defaulter must be aware of-

● Right to Receive a Notice

● Right to Fair Debt Collection Practices

● Right to Grievance Redressal

● Right to Seek Legal Assistance.

● Right to Fair Credit Reporting

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