In India, taking loans has become much easier thanks to digital lending platforms, NBFCs, and banks offering quick credit. But with ease of access comes the risk of default. Many borrowers, due to job loss, business failure, illness, or other hardships, are unable to repay EMIs. Such borrowers are termed loan defaulters.
While defaulting can impact your financial and legal standing, it doesn’t mean you’re without rights. Indian laws offer multiple legal protections and remedies to genuine defaulters. This article explains your options, from restructuring and insolvency to defending yourself against illegal recovery actions.
Who is a Loan Defaulter?
A loan defaulter is someone who fails to pay back the loan or EMI on time. In one client’s case, it was a technical default at first, a couple of missed payments. But it became a substantive default once my account remained unpaid for over 90 days.
According to RBI rules, if you miss payments for 90 days, the account becomes a Non-Performing Asset (NPA).
What Happens After You Default?
Here’s what to personally experience and what you might face too:
- Credit Score Crash: The CIBIL score dropped by over 100 points in a month
- Harassment Calls: Recovery agents began calling at odd hours
- Property Threats: The bank started sending SARFAESI notices
- DRT Summons: He got a legal notice to appear before the Debt Recovery Tribunal
- Fear of Auction: They even listed my shop for auction
But this isn’t a horror story. It’s a survival guide.
Legal Remedies That Help to Get Back on Feet
1. That SARFAESI Notice? You Have the Right to Fight It
When the client received a 60-day SARFAESI notice, he thought he had no time. But he learned that Section 13(2) gives him time to reply with objections.
Case Tip: Mardia Chemicals Ltd. v. Union of India: Supreme Court confirmed your right to be heard.
2. How to Challenge the Bank in DRT And Delayed the Auction
After receiving a possession notice, the client filed an appeal under Section 17 of the SARFAESI Act within 45 days. It bought him crucial time.
The Debt Recovery Tribunal asked the bank to justify their action, and found irregularities in the valuation process.
3. One-Time Settlement (OTS) Helped Client
The client met the bank manager and explained his genuine hardship. They offered an OTS, allowing me to close a ₹9 lakh loan with ₹6.2 lakhs.
Case Insight: Central Bank of India v. Ravindra: The court held that most banks must recover interest in fair manner.
Pro Tip: Always ask for OTS in writing. Negotiate respectfully. They want recovery, not litigation.
4. Filing Insolvency: How It Helps
If your debt exceeds ₹1,000 and repayment is impossible, you can file for individual insolvency under IBC Section 94.
It gives you a temporary moratorium, a legal pause in all recovery actions.
Note: You must not have filed for insolvency in the last 12 months.
5. Harassed by Recovery Agents? Record and Respond Legally
A client was once threatened by a recovery agent at 8 PM. He recorded the call as well as filed a complaint.
Case to Know: ICICI Bank v. Shanti Devi Sharma: The bank was held responsible for the agent misconduct.
Your Rights:
- Agents cannot call before 7 AM or after 7 PM
- Abuse, threats, or house visits without permission are illegal
6. Client Filed an Online Complaint with RBI – It Actually Worked
The client used the portal of RBI CMS to lodge the complaint. Within two weeks, the bank was asked to respond formally.
Kishore K. v. SBI Cards: Shows that consumer forums and RBI can offer compensation for mental harassment.
7. Loan Restructuring: A Lifeline During the Medical Crisis
After a medical emergency drained client’s savings, he requested restructuring. He provided my hospital bills and salary slips. The bank extended my loan term and reduced EMI.
Banks are directed by RBI to consider restructuring genuine cases, especially after COVID-19 disruptions.
8. Your Property’s Being Auctioned? You Still Have Rights
Our client found out that the bank’s valuer underpriced my commercial property. With help from a lawyer, he challenged the valuation process in DRT.
Mathew Varghese v. M. Amritha Kumar: Supreme Court ruled that improper auction procedure makes the sale invalid.
9. Can You Be Jailed for Defaulting? No – Unless Fraud Is Proven
Loan default is a civil matter, not criminal, unless there’s fraud.
But beware:
- Cheque Bounce under Section 138 NI Act = Criminal case
- Fraudulent loan application = IPC Section 420/BNS Section 318 (4)
If wrongly accused, approach the High Court as per Section 482 CrPC/Section 528 BNSS for quashing.
10. Bank Lied About EMI Terms? Take Them to Consumer Court
A client was promised a fixed EMI, but interest rates rose and EMIs jumped. He filed a complaint under Consumer Protection Act, 2019, and won compensation.
HDFC Bank v. Balwinder Singh: Bank fined for threatening borrower via SMS and calls.
5 Things to Know Sooner as a Loan Defaulter
- Always keep loan communication in writing: Emails are stronger than verbal promises
- Save every notice, receipt, and bank SMS: They become your legal shield
- Talk to the bank before it goes legal: Many cases can be settled early
- Don’t ignore SARFAESI notices or DRT summons: Respond on time
- Get a lawyer if you’re unsure: Your rights are too valuable to gamble
Conclusion
If you’ve defaulted on a loan, don’t panic or go silent. The law offers you a fair chance to usually explain, negotiate, and as well as protect your property and dignity.
From SARFAESI replies and DRT appeals to RBI complaints and settlements, with knowledge, a calm approach, and timely action, you can resolve your debt problems without legal scars.
One can talk to lawyer from Lead India for any kind of legal support. In India, free legal advice online can be obtained at Lead India. Along with receiving free legal advice online, one can also ask questions to the experts online free through Lead India.
FAQs
1. What documents do I need to challenge SARFAESI proceedings?
You’ll need a copy of the loan agreement, repayment records, SARFAESI notice, valuation reports (if any), and a legal affidavit or reply under Section 13(3A).
2. Can I stop bank auction by going to High Court?
Usually, you should first approach the DRT. However, in exceptional cases where procedural violations or fundamental rights are involved, you can approach the High Court under writ jurisdiction.
3. What happens if I don’t respond to a SARFAESI notice?
If you ignore the 60-day notice, the bank can seize and auction your asset without needing court permission. Non-response weakens your legal defense.
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