When a borrower takes a loan, he enters into a legal contract with the lender where he is liable for repaying the money he borrows. The bank or financial institution is allowed by law to use steps in accordance with the law to recover a loan if one has defaulted on it. The official declaration of a ‘defaulter’ and initiation of recovery proceedings against someone depends on the type of loan and the bank is supposed to give you sufficient time to prepare for any such case. Irrespective of the type of the loan, the defaulter has the right to be treated humanely and any undue harassment, humiliation or breach of privacy is a serious offence of the banking rules and moral principals which are punishable by law.
Banks are established legal entities and are bound by law to follow strict guidelines when it comes to recovering a loan. Debt recovery is a sensitive process and can put a notable degree of strain on the defaulter. The Reserve Bank of India and the Indian Banking Association have made strict rules and guidelines which have to be followed by the banks as a general code of conduct.
The bank has legal responsibility to be civil when it contacts any defaulter and any form of bullying or harassment is considered a criminal offense. The bank should be contacted if you are finding it difficult to repay your loans due to any unforeseen circumstances. The banks are expected to consider any genuine difficulties expressed while considering the steps for debt recovery.
The bank is supposed to follow strict guidelines when contacting the loan defaulter, particularly regarding the timing and place of any such contact. It is your right as a borrower to decide where the bank can contact you and the bank must honor such an agreement. If no place has been agreed upon, the bank may try to contact you at your house and if unable to then at your workplace. Your privacy is of great importance and any violation of the same is a very serious breach of banking ethics.
The bank has to follow certain guidelines to contact a defaulter and this notice period for repayment usually varies with the type of loan. The bank has to inform the borrower of their dues with a legal notice before it begins any proceedings against them. A minimum period of seven days is given by a bank before it can begin recovery proceedings.
The sole objective here is to recover any outstanding debt and not to deprive the borrower of his/her property. As per law, the process of recovery involves a transparent valuation and the sale. If anyone feels that the security is being undervalued, they can contact potential buyers to get a better price, but this should be informed to the bank.
Though repossession of security is the last resort to recover the loan amount, the banks are obliged to hand over the repossessed property back to the borrower if the amount owned are completely cleared during the period of repossession and the sale of the security.
Banks often employ recovery agents who specialize in recovery of loans and they are expected to follow a strict set of rules and code of conduct. These recovery agents must carry identity cards and authorization letter from the bank. They must maintain your privacy and behave with you in a civilized manner and any conversation should be strictly limited to business matters only. They can only contact your family if they are unable to contact you in any way and any if there are any threats, you have a legal right to complain to the bank.
It is of utmost importance to remember that a loan comes with a legal as well as an ethical obligation of repayment for both the banks and the borrower. Just as a borrower is supposed to return the money taken as a loan, a lender is also bound by certain laws and ethical practices to follow while taking any steps to recover such a loan.