We come across with a situation when we all borrow a loan to finance some major events of our life. Be it an auto loan for buying a car, a personal loan for paying a medical emergency, a home loan pay buy a house or a loan against property for business growth. Borrowing though a loan helps us to ease with the current financial crisis by putting liquid cash in hand. The loan is repaid along with interest as EMI’s. There may certain circumstances that can lead to non-payment of EMI’s on time and this inability to repay can create differences between the borrower and the Banks/ NBFC’s. These defaults of the customers let the lenders to take strict actions starting from follow-up calls to sending sales and credit officers to sending recovery/collection officers to recover the unpaid balance amount from the customer.
The Bank’s /NBFC’s services and rules guide their monetary policies. Lot of research is done to improvise and effective measures are taken while designing the lending as well as recovery policies. Recommendations are also taken for further improvements and this completely described procedure for lending and recoveries of the funds works as a manual to the related employees. Defaults in lending causes bad accounts and affects their future cash flow and create misbalance in their profit ability.
The amortization schedule is specified in the sanction letter and also discussed between the lender and the customer. The calculation of the interest and the principal, EMI’s and the modes of repayment are clearly explained to the customer. The bank expects the customer to stick to the agreed terms and conditions and discuss with the bank in case of any difficulty in the repayment of the loan.
General Guidelines of the Bad Debt Recovery
The term recovery refers to the collection of over dues and is recovered on installment basis depending on the nature of the business. The policies for the recovery and collection do not allow following any method that hurts the dignity and respect of the customer. The fair practices are followed to collect the dues or repossession of the security and promote customer’s confidence and the long lasting relationship with the Bank/ NBFC. The repossession of the security aims to recover the dues in case of any defaults instead of any financial distress for the customer. The repossession only happens after many attempts and discussions with the customer to resolve the default situations. It’s an exception that the customer’s financed asset is repossessed by the bank. This only happens if the customer violates any of the terms and conditions of the loan agreement.
Authorized representatives of the lenders follow the following set of rules for the collection process:
- Only the authorized people from the organization can follow up and has to provide the identity at first. The authority letter has to be shown by the Bank/ NBFC’s representative in the security’s repossession or the collection of dues.
- The Bank/ NBFC respect the privacy of the borrower. While contacting the borrower on phone or in personal for the recovery of the balance due, the bank do not intrude the privacy of the borrower.
- The Bank/ NBFC ensure that the communication either verbal or written will be in a simple business language and the interaction is done with civic manners.
- The timings are specified to 0700 to 1900 hours to contact the borrower unless the special circumstances require the lender to contact the customer at a different time.
- Borrower’s request to call at a different time is honored. If the he customer wishes he can be contacted at a different place of his choice other than his/ her residence or the business place.
- The efforts made for recoveries are always documented along with the gist of interactions with the borrower.
- The assistance is given to resolve the disputes in a mutually acceptable and orderly manner.
- Any inappropriate or other calamitous occasions are avoided for making calls / the collection of dues.
The other processes followed by Banks and NBFC for collection of dues is as under:-
Reminder notice/Dunning Letters
During the initial days the bank’s representatives follow up through telephonic reminder calls or by visiting the customer’s residence or business premises. The financial institute given written notices to the borrower informing them about the due EMI and requesting the borrower to clear the dues. Without giving any written notice, the Bank/ NBFC do not initiate any legal or any other recovery measure including the repossession of the security. If the borrower is intentionally avoiding calls from the bank/ NBFC, then the bank is free to move ahead with the repossession in case of secured loans and legal proceeding of recoveries in case of Unsecured loans.
Repossession of the mortgaged property
In case of secured loans repossession of property is done to recover the dues of the lender and not to hurt the borrower’s dignity in any form. The recovery process involves the repossession, valuation of the asset and realization of the outstanding amount by way of sale of the asset. The repossession is done only after the final notice is sent to the borrower and the process is done by keeping all legal formalities in mind. The Bank/ NBFC will ensure the safety and the security of the property possessed by the Bank/ NBFC.
Valuation and Sale of Property
Valuation of the property is done by all legal means and in transparent manner. In case of a secured loan like Loan Against Property, Home Loan or mortgage, the value approved by the valuer of the company is conveyed to the borrower before proceeding further for the sale. Even if the sale is being done by the borrower then the sale bid should be higher to cover the due balance amount of the loan. The Bank/ NBFC holds the right to recover any due amount even after the sale of the property. Any excess amount is returned to the borrower after clearing all the expenses.
Borrower’s opportunity to take back the security
As discussed above that the repossession of the secured asset is done only for the purpose to recover the due amount from the borrower and not with a deprived intension. As per the agreement, the Bank/ NBFC will willingly handover the possession to the borrower before finalizing any sale transaction of the property. With the genuine reason of inability to repay the installments within the scheduled time frame, the lender may consider to handover the property within 7 days after receiving the installments. This is only done if the lender is convinced with the arrangements and the borrower ensure to repay the remaining amount in equal installments in future.
Preventive Measures the Borrower can request to avoid Collections and Recoveries
Intentionally no one delays payment or the EMI’s for few months on a regular basis. There are circumstances of losing a job, high fees for further education or any other emergency that eat up all your savings. But, whatever the reasons may be, you can always opt for any of the following options:
The borrower can always ask the Bank/ NBFC to provide him for a EMI holiday for few month. The inability to make regular payments can be due to a job change or a temporary loss of business or employment. Though the penalties are charged for the delayed payments but the lender do consider the genuine reasons for the delays.
Reduction in EMI
If you are struggling with the EMI burden and want a considerable reduction in monthly outflow, the borrower instead of defaulting on loan can anytime request the lender to increase the loan tenor. This will definitely reduce the EMI burden but you might end up paying a higher amount of interest. Once your financial health stabilizes you can again increase the EMI and end your loan on an early date.
Restructure of Loan
A relaxation in terms and conditions can always be requested if the borrower is unable to maintain them. This can help the borrower to avail reduced charges, lower interest rates, increased loan tenor etc. this will not only relax the borrower but also he will be able to maintain the regularity in the repayments.
One Time settlement of loan
This option arises when the borrower is unable to pay the loan to an extent where the interest charges are higher than the principal amount. The Bank/ NBFC declare the loan as a nonperforming asset (NPA) and the borrower as bankrupt. When the borrower is not in condition to pay the loan amount, he is allowed to settle the loan account by paying a one-time payment. The only disadvantage of this option is that – it is reflected in your credit report affecting your credit score and doubting your credibility in future.
An opportunity is given to all the borrowers if they are facing any problem in repaying the EMI’s on time. They can approach the Bank/ NBFC and ask to restructure the loan to enable the smooth repayment process. The lending involves a lot of risks and if not handle with care can turn out to be an activity of loss for the Bank/ NBFC. Before lending, they have to be more cautious. Just a single missed opportunity and it can bring huge losses for the Bank/ NBFC. The RBI guideline states that the Bank/ NBFC have to give a reasonable amount of time to pay the due amount. In case of any demise like death, serous ill-health or accident the Bank/ NBFC give a justified holidays to the customers and his family.
The Bank/ NBFC should always have a clear picture of your financial health. They should be aware when you can resume your payments of your loan. Do not avoid the follow-up messages or calls from the Bank/ NBFC and instead take it as a priority. Pulling your hands from unnecessary expenses can add a sum of amount to your savings and help to repay your debts on time. It’s not only a moral obligation but also a legal responsibility to pay off your loan dues completely and that too on time as agreed between the lender and the borrower. Few easy ways can sort the situation temporarily but still, it is important to ensure that you pay all your dues and your credit worthiness is not harmed in any way.