Explained | Five rights of borrowers on loan default

1. Right to privacy

Even after defaulting on a loan, borrowers have the right to privacy. The RBI guidelines state that banks have to manage risks and follow the code of conduct while outsourcing financial services. Banks need to ensure that recovery agents are properly trained to handle clients with care and sensitivity and are aware of their responsibilities, especially aspects like hours of calling and the privacy of customer information, among others.

Any information regarding the loan or recovery has to be given out only with the consent of the borrower. No bank, regulated entity or recovery agent can misuse or violate a borrower’s privacy. Agents should contact the borrower only at the place specified by him/her, in the absence of which agents can contact the borrower at his/her residence or workplace.

The RBI’s recent circular states that recovery agents employed by regulated entities should not call borrowers before 8:00 am and after 7:00 pm for the recovery of overdue loans. Borrowers can take legal action against the collection agency for misbehaving or violation of their privacy.

“The first step towards ending harassment from creditors is to understand that a borrower is well protected by law against harassment from financial and recovery agents,” said Ritesh Srivastava, founder of FREED, a debt relief platform. “In case recovery agents continually harass them, a consumer should reach out to the lender directly and explain their financial situation to get relief.”

2. Decent behaviour

The RBI mandates that recovery agents should adhere to extant instructions in the Fair Practices Code for lending as also their own code for collection of dues.

“Banks have to do a thorough background check and conduct due diligence of the collection agency before onboarding it,” said Nitin Purswani, cofounder of Medius, an artificial intelligence-driven debt collection solution for banks. “Banks have to set up internal mechanisms to deal with complaints of the borrowers in case of any misconduct by the agencies.”

The central bank, as the regulator, has clearly stated that regulated entities and their agents should not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the debtors’ family members, referees and friends, making threatening and anonymous calls or making false and misleading representations.

“Basic human rights of maintaining dignity, not calling/appearing on doorstops beyond business hours, non-defamation, cannot cease to exist due to a default,” said Namita Shah, co-founder of Presolv360, an online dispute resolution firm.

Upon a default, it is important to note what is permissible by the financial institution as a recovery mechanism and what is not, Shah said. For example, if the agent calls once during business hours, it is permissible because it is the business of the financial institution to recover its dues. However, if several agents call many times each day, that too at odd hours, that is not permissible, she added.

3. Adequate notice

Following a default, banks are required to give the borrower sufficient notice for repossessing his/her underlying mortgage assets. As per the rules, a bank classifies a borrower’s account as a non-performing asset within 90 days of default. In such a case, banks have to first issue a 60-day notice to defaulters. If the borrower still does not pay, then the bank has to make another 30-day public notice. Only if the defaulter still does not adhere to the timeline can a bank initiate the sale of assets.

“Once a default occurs, the borrower cannot stop the creditor from taking legal action. However, the borrower can take pre-emptive steps before the default occurs by engaging with the lender and making efforts for restructuring of the loan, offering the lender a definitive timeline for repayment of the outstanding dues, and offering further security,” said Nirav Shah, a partner at DSK Legal.

The borrower may also consider explaining to the lender that the reason for default was a genuine business downturn and that it expects to recover within a short period of time, said Shah. The borrower has the right to challenge any insolvency action that the lender may initiate on the grounds of completeness of the application, rate of interest charged, and question the amount/quantum of total amounts due, Shah added.

Also read: Hazaribagh incident: Did Mahindra Finance follow RBI directives on recovery agents?

4. Fair valuation

Despite a default, a borrower is entitled to a fair value of his/her underlying assets. Before liquidating the asset, the lender has to issue a notice specifying the fair value of the asset, the reserve price, date and the time of auction.

According to Purswani of Medius, lenders must conduct a fair valuation of the assets before disposing of the same.

Sonam Chandwani, managing partner at KS Legal & Associates, said if borrowers feel the asset is undervalued, they can contest the auction. Borrowers have the right to look for a new buyer and introduce them to the bank in such a case, she added.

5. Balance proceeds

Lenders should ensure that any excess amount from the sale proceeds of the asset is paid to the borrower. The lender can recover its dues but the excess amount has to go to the borrower without delay.

Borrowers have various legal rights, including the right to get the balance proceeds, and the right to get a fair valuation of the assets, said Soayib Qureshi, associate partner at PSL Advocates & Solicitors.

“The valuation is required to be carried on by a registered valuer. There have been instances wherein the courts have set aside the entire auction process on account of unfair valuation or fraud in the auction process,” said Qureshi.