If Vijay Mallya's case is anything to go by, we would all
be living without fear, on having defaulted on a loan from the bank. But alas,
common people like you and me may not be so lucky!
So whenever we reach a situation where we are unable to
pay an instalment of the home loan or auto loan or maybe even the micro-loans
that have become fashionable nowadays - the question that looms before us is -
will I be sent to jail for my loan default?
Frankly, the simple answer is most probably not.
But there are a few factors which you need to understand:
A loan default can be considered as a crime under
Section 420 of the Indian Penal Code (IPC).
The Bank can file a case against you for cheating if
you intentionally refuse to pay back the loan amount and are considered as a
If a case is filed and you are convicted by the
Court, you can face a jail term which can extend to a
period of 7 years.
But this is not the usual practice in default cases.
The truth is that Banks do not like to file cases of recovery in the Court
as they have to bear additional charges for the case as well - which can
become a burden even for the bank.
So what can you actually expect the bank to do in case of
default in loan repayment?
Debt Rescheduling: The bank can opt to give you an
option of a lower EMI for a longer period so that you are able to repay the
Deferring the Payment: In case of sudden situations
like loss of a job or some unforeseen expenses, the bank can also give you
an option to give you a brief relaxation period of a particular time frame
and recover the debt on a later date.
Loan Restructuring: Mostly used in cases of home
loans, the bank can also grant you an extension of up to 1 year for
repayment of the loan.
Loan Conversion: The bank can also give you an option
of converting your unsecured loan into a secured loan, which will
significantly reduce your EMI.
One Time Settlement: In a scenario where you are
unable to pay regular EMIs, you can request the bank to accept a lump sum
capital amount and to settle the loan.
These are the situations where maintaining cordial
relations with the bank employees comes in useful!
However, if you are absolutely unable to repay the loan
amount, the bank will be forced to take the following steps against you:
The bank can initiate proceedings under the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interests (Sarfaesi) Act. If your account is classified as a
non-performing asset (NPA), i.e., repayment is overdue by 90 days, the bank
will have to first issue a 60-day notice to you.
If you are unable to repay the amount within this
period, the bank has the right to proceed with the sale of assets.
To proceed with the sale of assets, the bank will
have to serve a 30-day public notice with details of the property.
The bank also has to issue a notice specifying the
fair value of the property.
You can raise objections to the repossession or
valuation notice to which, the bank has to respond within 7 days after which
the bank has the right to sell off the property (only that which is shown as
the security against the loan amount).
In case of default on your part, the bank will surely not
be too polite with you. But that does not mean that they can send hooligans to
your home as recovery agents to coerce you to pay. The RBI has given specific
orders against such behavior by banks.
But let's try to be a little more responsible and not
create a situation for ourselves where the prospect of going to jail haunts us!