Know the rights of a home loan defaulter and how to deal with the situation

People take a home loan for a very long duration. During this period, there may be some sort of financial emergency. A borrower may default in case he is unable to pay the EMI. Even in such cases, the bank can't take arbitrary action. The defaulter has some rights. In this article, the author discusses these rights. He has also mentioned what should a borrower do on his own in case of financial difficulties.

Every person aspires to own his/her own home. But in the metro cities of India, the cost of acquiring a house or a flat has been sky-rocketing over the last thirty years or so. It is almost not possible to purchase a dwelling unit in the major cities of India entirely from the saving of a person. So, most of the people acquire dwelling units by taking a home loan from banks or other financial institutions. Taking home loan is income tax-friendly also.

It has been observed that most of the people take the home loan for a duration of more than ten years. In some cases, the duration of the loan is twenty years. During this very long period, various emergencies may come to one's life. The person who took home loan may suffer from major illness; there may be job-related problems, transfer, reduction of salary, or any other unexpected issues. In such cases, a person can default paying the monthly EMI. Now, many people think that in case of default in paying EMI, the residential property will be forcibly taken back by the lender (the bank or the financial institution). But that is not so. The person who has taken home loan has some well-defined rights, but most people don't know the rights. These rights have been finalized jointly by The Banking Codes and Standard Board of India (BCSBI) and Indian Banks Associate (IBA). In this article, we will discuss the rights of the defaulters and also what should a defaulter do under such circumstances of financial difficulties.

First right of the defaulter: Right to receive notice

Defaulting to pay a loan is not a criminal offence. The lending bank has to give sufficient notice to repay the dues before repossessing the residential properties. The proceedings are generally taken under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act. If the repayment is overdue for 90 days or more, the lender has to issue a 60-day notice to the defaulter. If the borrowing person fails to repay within the notice period of 60 days, only then the bank can initiate the proceedings of the sale of assets, but that too after issuing another 30-day public notice.

Second right: Right to be heard by the bank

During the 60-day notice period, the borrower can make a representation to the concerned officer objecting to the repossession notice. The officer is bound to reply within seven days giving proper justification to the proposed repossession.

Third right: Right to have fair valuation

When the lending bank starts the process of auctioning, then it will have to send another notice to the defaulter indicating the fair value of the property, reserve price, date and time of auction. The defaulter can object to the fair value fixed by the bank if he finds that the property is being undervalued by the bank. He can also convey any better offer which he may have received.

Fourth right: Bank to return balance amount

The defaulter should not forget the asset as soon as the lending bank goes for auction. The defaulter must keep close track of the entire auction process. This is now very much possible because most banks nowadays go for the e-auction process. This is important because the bank is supposed to pay the balance amount to the defaulter after deduction all the dues. But generally the defaulter doesn't pursue the case and the bank doesn't return the balance on its own.

Fifth right: Right to humane treatment

The defaulter must remember that the lending bank can't send recovery agents to his resident at ungodly hours and those recovery agents can't harass, heckle the defaulter or his family members in presence of others. The defaulter has to right to indicate the place where the bank can send its agent(s). Further, the agents have to visit the defaulter at his indicated place between 7 a.m. to 7 p.m. Their behaviour must be civil and decent. Further, the recovery agents or the bank personnel can't discuss the defaulter or his loan with any other person in the locality.

What should the defaulter do

We have discussed the rights of the defaulters. But, if a borrower finds that it would be difficult for him to pay back the loan due to adverse financial circumstances, he should take some steps on his own. These steps are mentioned below very briefly.
  1. If a borrower finds that the EMI is very high due to some changes in his financial condition, he can very well go for the restructuring of loans. There are various types of restructuring. He can contact the lending bank on his own and restructure the loan before receiving any notice.
  2. The borrower can also go for part payment of the loan by liquidating his investments. In this way, the borrower can reduce the EMI to a considerable extent.
  3. In the extreme case, when the borrower can't manage to pay the EMI by any means, he can go for disposing of the property himself, making every effort to get the maximum price. Thereafter, he can pay back all the dues to the bank.

Summing up

A defaulter must remember that he has not committed any criminal offence by defaulting. The lending bank can't harass or humiliate him. He must know his rights. On the other hand, the borrower must analyse his financial condition regularly and take appropriate action as mentioned above before the bank starts the process of acquiring his property.

To know more details on personal loans read this article:

All You Need To Know About HDFC Personal Loan


Author: Venkiteswaran12 May 2020 Member Level: Gold   Points : 10

It is said with regard to the patient-doctor relationship that "Doctor is seen as an angel saviour when the patient is brought in serious condition. He is seen as a noble human when the patient is recovering. He suddenly becomes a devil when the bill is given".

A similar attitude is also there in the banker-borrower relationship also. The attitude, actions and reactions of both are responsible for this. Generally, the borrower defaults occur due to some unexpected events hampering money inflow to the borrower. They can be illness, loss of a job, other emergencies etc. Then there are some wilful defaults by borrowers even though they have sufficient money to repay. While this article describes the 'rights' of the borrower, one should also know that there are some preliminary important duties for the borrower before claiming the rights.

It is usually experienced that many non-wilful defaults become difficult because of ignorance of the borrower about informing the possible default at the right time. Sometimes even after repeated reminders, the borrower (out of helplessness and hesitation also) does not respond. This results in a mistaken perception that the borrower is wilfully defaulting. Once such things happen, it will lead to legal procedures. The banks have their legal team and they take care of the legal requirements. Hence there will not be much room for complaints about not giving the 'rights' of the borrower.

Instead of dealing with them as enemies, the borrower and the bank (especially the borrower) should deal as mutual beneficiaries in business and always be open-minded and exchange information sincerely and truthfully. That will enable a solution for any difficulty including default.

Guest Author: Partha Kansabanik15 May 2020

Mr Venkiteswaran, thanks for reading this article and posting a very relevant and useful response on the issue. Yes, those who take home loans must be aware of their duties along with their rights. But, unfortunately, at the time of taking a home loan, the agents or the bank officials do not guide them to read and understand their rights and duties. The loan-takers, in a hurry to fulfil all formalities which are considerable, try to finish off the paperwork as quickly as possible and try to sign the dotted lines without knowing anything.

As I have already stated in this article, a home loan is taken for a very long period. Various issues may happen in the life of the person who took the loan. So, defaulting payment of EMI may be natural. If the person knows the rights and duties, he/she can handle such a situation very well. Particularly, some private sector banks and financial institutions harass the loan-takers in various ways even if they miss just one EMI. Knowing the rights and duties would help such persons to face the problem more boldly and efficiently.

Those who take home loans must understand that defaulting EMI is not a crime and there are various ways to adjust the EMI which has been missed.

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