RBI Guidelines for Personal Loan Defaulters - Explained

When people have a planned or unplanned expense to meet and need money on short notice, they turn to Personal Loans for financial assistance. Many lending institutions offer these unsecured loans at competitive interest rates and flexible repayment terms. When a person borrows a loan, they usually don't have the intention to default eventually. However, circumstances may change and repaying the EMIs on time may become challenging. Since Personal Loans are unsecured and do not involve any collateral, security, or guarantor, one may obviously wonder what will happen in case of a loan default.

Many believe lenders treat loan defaulters strictly, threaten them, and hassle them with daily calls and visits. However, that’s not the case. Lenders must take action under the Personal Loan rules and regulations in India. Below we will explain the consequences of loan default and understand the RBI guidelines for Personal Loan defaulters.

Definition of Personal Loan Defaulters

Typically, a Personal Loan defaulter is a borrower who delays an EMI repayment by more than 90 days. The exact timeline may differ between lenders and loan agreements. When people borrow loans, they must repay them to the lender in equated monthly installments. They get a specific EMI date each month, by which they must pay an instalment without fail. If they miss a few repayments in a row, they become Personal Loan defaulters. A wilful defaulter is one who does not pay the EMIs despite being capable of doing so.

Importance of Repaying Personal Loans on Time

People borrow funds to meet any Personal Loan purpose, including weddings, home renovations, education, medical emergencies, vacations, etc. Obtaining these loans has become extremely fast and convenient. However, repaying them on time is of the essence. Here is how timely repayment of loans helps:

• Build a good relationship with the lending institution
• Improve the credit score to boost eligibility for future loan applications
• Ability to get future loans with higher loan amounts, lower interest rates, and favourable terms and conditions
• Money saved by staying away from late payment charges and penalties    
• Easy access to top-up loans when the need arises
• Better loan offers for bigger loans like home and car loans
• Pre-approved offers on other loans
• Easier access to credit cards with higher credit limits 

RBI Guidelines for Personal Loan Defaulters

Let’s understand the RBI guidelines for personal loan defaulters in India:

Legal Framework

According to the RBI rules for Personal Loans, even defaulters have rights they can exercise. If the borrower does not repay the missed EMI within a specific period, the loan provider can file a case against them under Section 138, Negotiable Instruments Act, 1881. 

Responsibilities of Lending Institutions

If the default is not intentional but genuine, the lender must work with the borrower to modify the repayment plan. Their primary aim should be to make the repayment easier for the borrowers rather than unnecessarily dragging them into legal action.

Borrower's Rights and Obligations

Even defaulters have certain rights they can exercise. Firstly, they have the right to notice. That means the lender must give them enough time to repay the outstanding balance. Second is the right to fair value, which mandates giving fair value of the collateral in case of a default. It does not apply to Personal Loan but to secured loans. Another right is the right to be treated politely, which means the lender should not harass, humiliate, mistreat, or abuse the defaulter during recovery.

Steps Taken by RBI to Address Personal Loan Defaults

RBI loan guidelines for recovery ensure that the process benefits the lenders without compromising on the borrower's legal rights. There are two ways of loan recovery: judicial and non-judicial. Suppose the borrower has defaulted on the loan due to unavoidable circumstances but otherwise has a decent credit history. In that case, the lender may offer them a few options, such as extending the repayment tenure, a moratorium for a few months, waiving off a certain loan amount, etc.

If the borrower fails to repay the loan despite several reminders, the lender hires loan recovery agents who must act within the RBI guidelines for loan defaulters. First, they must send the defaulter an authorization letter and a notice. If the borrower files a complaint, the recovery agency can only proceed if the complaint is resolved. The RBI also instructs the lender to address the borrower's grievances appropriately.

RBI Guidelines for Personal Loan Defaulters 

Let’s look at the RBI guidelines for loan defaulters:

Grace Period and Overdue Period 

A Personal Loan becomes delinquent but does not default if the payment is late by just a few days. Lenders give a grace period of 10-15 days to pay the missed EMI. During this period, they send reminders to borrowers to repay the EMIs as soon as possible. The overdue period begins after the grace period is over.

Actions Taken During the Overdue Period

Once the grace period is over, the overdue period starts, which is stricter than the grace period. If the defaulter enters the overdue period, the lender takes action and charges a late payment fee (a percentage of the due amount).

Declaration of Loan Account as Non-Performing Asset (NPA)

If the defaulter does not repay the outstanding amount even after the overdue period, they declare the loan account as a Non-Performing Asset (NPA). It refers to an asset that no longer generates money for the lending institution, leading to its loss of income and profitability.

Recovery Process for NPAs

Lending institutions take several measures to recover NPAs. Restructuring the repayment plan, maintaining cash flow, and converting bad loans into equity are some components of the recovery process for NPAs. Finally, they sell bad debts to debt collection agencies at steep discounts.

Consequences of Loan Default

According to the RBI loan guidelines, a loan default results in the following consequences:

Impact on the Credit Score: If the payment is due past 30 days, the lender reports it to the credit bureau as a late payment, reducing the borrower's credit score by a few points. Besides late payment penalties, missed payments damage the borrower's credit score. They stay on the credit report for as long as seven years, decreasing their eligibility for future loans.

Reminders from the Loan Provider: Once the borrower delays an EMI, the lending institution starts sending them reminders about delayed payments. If the borrower still does not heed and pays the missed EMI, the lenders take further action to mark the borrower with an NPA, reducing their credit score and making future loans difficult to access. 

Legal Action and Penalties: Missing an EMI payment results in late payment penalties that increase the total loan cost by the term's end. If the borrower still does not clear the due amount, the lenders take legal action according to the RBI guidelines for loan defaulters.

How to Apply for a Personal Loan Online? 

Here is the stepwise process for online application for Personal Loan:

• Downloading the loan app on a smartphone
• Filling out an online application form with Personal Loan purpose, contact details, loan requirements, etc.  
• Scanning and uploading the documents required for personal loan documents required for personal loan, including the identity, address, and income proofsWaiting for the verification process to complete
• Getting approval and reviewing the loan offer
• Accepting the offer to get disbursal within a few hours 

Conclusion

After determining their Personal Loan purpose, borrowers must ensure they can repay the loan on time while following the terms and conditions. While choosing the right lender is an important step for a quick and hassle-free loan process, it’s also crucial to ensure they follow RBI guidelines for Personal Loan defaulters. At Hero FinCorp, we act legally and try our best to make repayment easier for you under tough financial conditions.

Frequently Asked Questions

1. What is the legal action for the defaulter of a Personal Loan in India?

Legal notices, debt collection, NPA, and case filing according to the RBI rules for Personal Loans are the legal actions lenders can take against Personal Loan defaulters in India.

2. Does the loan defaulter go to jail?

According to the Personal Loan rules and regulations in India, loan default does not directly result in imprisonment. It is a civil offence and does not attract criminal charges. That means a defaulter will not go to jail. 

3. Is loan default civil or criminal?

Loan default is not a crime in itself. However, loan companies can approach civil courts to recover their loss. Therefore, a loan default is a civil offence, not a criminal.

4. What if a person does not pay a Personal Loan?

If a person does not pay Personal Loan, they damage their credit score, reduce their eligibility for future loans, and end up increasing their total loan cost apart from the hassle of legal action.