What Happens if Personal Loan is Not Paid in India?

Posted On : May 27, 2022
What Happens if Personal Loan is Not Paid in India?
Do you have some upcoming expenses but lack any savings to use? Are you planning to take a personal loan for the same? Are you aware of what happens if personal loan is not paid in India? If not, then read all the information below and know what you can do if you lost your job and thus are unable to pay a personal loan.
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Wish to know the punishment for non payment of personal loan? Or due to lost job, unable to pay personal loan? Do you know what will happen if personal loan not paid in India? If you have received a legal notice for non payment of loan, some things should be understood at this level. Answers to all above questions and other related aspects like RBI guidelines for personal loan defaulters have been laid hereunder.

What is a Personal Loan?

A loan is a debt taken from a person, bank or other financial company. The person who takes a loan is the debtor and the one who gives such an amount is the lender. The amount credited has to be returned usually accompanied with a certain amount of interest. Banks offer specified categories of loans, one of which is personal loan. It is an unsecured loan, i.e. the debtor is not required to pledge any valuable security in order to get the amount through loan.

Due to Lost Job, Unable to Pay Personal Loan?

In the initial days of COVID-19 pandemic, so many people lost their jobs. People usually have their liabilities like expenses and loans dependent upon their sole income which is a job. If that is lost, repayment of loan instalments also halts along with other factors impacted due to the financial crisis. In such a case, the debtor should contact the lender, i.e. the bank officials regarding current inability to pay EMIs/ loan instalments. As per the RBI guidelines for personal loan defaulters, they may be given some time in such cases. It should be noted that banks only focus upon their money and they are bound to find a solution for genuine cases whereby the said loan default is not wilful. For personal loan consultation in India, banking lawyers near me may help out with the technicalities.

What Happens if We Don't Pay Personal Loans in India?

Sometimes, the people who took a personal loan experience some unexpected phase in life like loss of job, financial losses in business, etc. Such people often have queries like what happens if unsecured loan is not paid? What if I receive a legal notice for non payment of loan? Can I go to jail for not paying a personal loan in India? Although there is no concrete answer to this, more or less it depends upon the amount of money received through loan. For banks, such loans become non-performing assets and are troublesome. Coming to personal loan defaulter legal action, the banking or financial companies may resort to the following:

  • Damage CIBIL Score - For those who are confused, CIBIL score is a measure that reflects the credit-worthiness of a person. It plays a vital role while the process of loan approval is underway. Unpaid liabilities like credit card bills, personal loans affect the CIBIL negatively. The first answer to what happens if personal loan is not paid in India is deterioration of credit profile through CIBIL.
  • Harassment by Recovery Agents - Since recovery of bad loans is a regular task for banks and non-banking financial institutes. Thus, they have to hire certain recovery agents who can compel the defaulters to pay back the amount. Sometimes, these recovery agents use techniques like harassing the defaulter in front of coworkers, neighbours, etc. It may be noted that harassment by recovery agents if personal loan is not paid in India is not at all a legally celebrated practice.  
  • Arbitration - Usually, the loan agreement mentions dealing with any kind of legal disputes related to loan default to be resolved through arbitration, which is another method of alternative dispute resolution. However, it is a fact since there is a written agreement and the arbitrator follows the factual compliances with law, decision is usually in the favour of financial companies. In case of salaried person who is a wilful defaulter, the arbitrator is also empowered to order their employer to transfer 50% of the defaulter’s salary to the said bank
  • Criminal Matter - If the documents like payslip, cheques etc. deposited with the bank are forged or if there is any instance of cheating, the bank may bring in criminal proceedings against the defaulter. Also, blank cheques taken by the banks during loan approval as a security might be used in case of default, which, if bounced, paves way for criminal proceedings under Section 138 of Negotiable Instruments Act, 1881.
  • Debt Recovery Tribunal - It is a statutory body that adjudicates matters related to insolvency of individuals as well as other juristic persons. Banks seek professional aid from debt collection lawyers at such time which worsens the case for personal loan defaulters. The bankruptcy and debt lawyers in India are required to be hired at such times.
  • Civil Courts - If the amount of personal loan involved is higher, for example in a few lakhs or crores, then proceedings of insolvency under the Code of Civil Procedure, 1908 may begin. A legal notice for non payment of loan is served to the defaulter in that regard. The proceedings may include attachment of property particularly for wilful defaulters.


What Happens if We are Not Able to Pay Personal Loan? - Options for Genuine Customers

Banks have their sole interest in getting as much money as they can against a non-performing asset. Thus, the loan defaulters should approach their banks and communicate their reasons for non-payment of personal loans in India. One of the following approaches may be resorted to:

  • Lower EMI/ Instalment - If financial crunch due to some exigency is the reason for loan default, the defaulter may request the banker to reduce the EMI amount. Although this may result in an extension of the period of paying back the loan. However, it is a better way to pay back the loan and escape any negative outcomes due to inability to pay back the personal/ unsecured loan.
  • Settlement through Haircut - For genuine customers who are unable to pay back the personal loan, the loan amount is not huge, and it is feasible to settle the same. In such a case, the bank may agree to haircut the loan. Under this method, the bank may settle the dues among the amounts of principal and interest. This way, an escape from non-performing assets can be achieved by both the bank and the defaulter. In return, the defaulter gets a confirmation of freedom from any legal action in the future against the unpaid personal loan.
  • EMI-Free Phase - In case the financial inability is short termed, the same can be communicated to the banks. In such a case, the bank may allow the debtor to enjoy a EMI-free period which will be certain and the EMIs may carry on after the expiry of the said period.


RBI Guidelines for Personal Loan Defaulters

Reserve Bank of India is the central regulatory as well as supervising body for banks and financial companies in India. It can be termed as the backbone of the financial system in India when it comes to saving the economic interests of the individuals, banks and the country as a whole. Time and again, RBI keeps releasing circulars containing specific instructions to the concerned banks/ financial companies or the public at large, as required. RBI guidelines for personal loan defaulters against harassment by banks or their recovery agents are as follows:

  1. All terms regarding the loans should be disclosed before the customer seeks a loan in a clear manner. Such terms should specifically contain the amount credited, the interest rate, duration for instalment payment and also the action to be taken in case of default.
  2. The lending bank or financial company should not discriminate grant of loans based on sex, caste, religion, etc.
  3. The borrowers should be given at least 30 days before account review in case of default in payment of loan instalment.
  4. In case of default, genuine defaulters should not be bothered and should be given some time for recovery purposes.
  5. The recovery agents hired by lenders should not resort to undue harassment of customers.
  6. Use of muscle power against defaulters for recovery of loans is strictly prohibited.
  7. The defaulting customer can be visited at the place specified by him/ her, place of stay or work.
  8. The loan defaulter should be contacted at the time specified, or between 7 am to 7 pm only.

Can I go to Jail for Not Paying a Personal Loan in India?

For people searching for ‘what happens if personal loan is not paid in India’, apprehension of arrest is normal. But there is a legal fact which people are not usually aware of. If you receive legal notice for non-payment of loan, it does not mean that non-payment of loan will directly take you to jail/ prison. It should be noted that non-payment of any kind of loans to the banks is a matter of civil laws in India. Criminal proceedings can not be initiated unless there is a factor like cheating, forgery of documents, etc. is involved. Also, if payment of loan is done through cheques and the same gets bounced, cheque bounce case under Section 138 of Negotiable Instruments Act, 1881 may be invoked. The punishment for non payment of personal loan can be imprisonment in worst cases since the banks get nothing by sending the defaulter to jail. Their interest lies in the payment of loan. The bank may start with settlement, arbitration, or even a civil suit. In the worst outcome of a civil suit can there be imprisonment.


By now, the readers must be all scared of ever taking up a loan from banks or financial companies. However, it is strictly advisable to engage in debts with such registered bodies only. It is way more risky if funds are indebted through private persons. First, make sure that there is no scope for non-payment of personal loans. If at all due to genuine reasons, it is impossible to pay back the loan for the time being regarding unexpected money crunch, then communicate with the banker. Since their interest is in payment of bad loans and not to pull loan defaulters to prison, they will get back to you with genuine solutions. In any way, rather than looking for an escape, stay calm and find out ways on how to pay back the personal loan in India.

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Dear Sir, Remedies against harassment by Recovery Agents February 18, 2021 Written By : Kishan Dutt Kalaskar Retired Judge Leave a Comment There are numerous cases of the oppressive and illegal conduct of recovery agents attempting to recover pending dues for the banks' benefit. In the past few years there have been many such instances, to showcase an example, an 81-year-old woman was seriously threatened by recovery agents, she got 375 threatening calls concerning her child's unpaid bank dues. After that, she moved to the police, and a case was filed against these agents. Another incident quoted as per media reports stated that a private bus was halted, and 42 travellers were held hostage for three hours by recovery agents, who needed to recover money from the travel company that owned the bus. These cases affirm that recovery agents/offices are feared in India. A recovery agent seeks clients and organizations that owe instalments to banks. Many of these recovery agents collect the banks'clientspayment dues for a charge or a percentage of the total amount owed. These agents are generally a third-party https://www.vidhikarya.com/legal-blog# You may get issue a strong legal notice from my office or file a Suit for Permanent Injunction against Recovery Agents and Bankers. ICCI Bank Limited vs. Prakash Kaur case, The Supreme Court in a landmark judgement reiterated its earlier stand that banks cannot deploy musclemen for recovery of loans from defaulters thus forcing them to end their lives. "We deem it appropriate to remind the banks and other financial institutions that we live in a civilised country and are governed by the rule of law," a bench comprising Justices Tarun Chatterjee and Dalveer Bhandari said. The court while dismissing the ICICI Bank's plea refused to delete the Delhi High Court's remarks that held the bank and its musclemen responsible for abetting a youth to commit suicide by humiliating him and taking away his motorcycle financed by the largest private sector bank. It also asked the ICICI Bank to to pay Rs 25,000 as cost of this litigation to the respondents within three weeks and directed the Delhi Police to conclude the investigation against the bank expeditiously within three months, keeping in view the gravity of the allegations. The court also directed the concerned Deputy Commissioner of Police to submit the investigation report in the Delhi High Court. According to the court, complaints received by Reserve Bank regarding violation of the above guidelines and adoption of abusive practices followed by banks recovery agents would be viewed seriously. Reiterating the RBI Guidelines on Engagement of Recovery Agents, the court said, "The Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a particular area, either jurisdictional or functional, for a limited period. In case of persistent breach of above guidelines, Reserve Bank may consider extending the period of ban or the area of ban." "RBI had expressed its concern about the number of litigations filed against the banks in the recent past for engaging recovery agents who have purportedly violated the law," Justice Bhandari, writing the verdict for the bench, stated. RBI in a letter accompanying its April 24, 2008 Guidelines had stated that it might consider imposing a ban on a bank from engaging recovery agents in a particular area, either jurisdictional or functional, for a limited period. ICICI Bank had moved the apex court seeking deletion of some paragraphs in the High Court order which had said that "...the proximate cause of death of the deceased that led him to commit suicide was on account of humiliation caused by the Bank people from where loan was taken by him." "The modus-operandi employed by the banks like ICICI for realisation of their loan amount and for recovering the possession of the vehicle against which loans are given is extra legal and by no stretch of imagination they can be permitted to employ musclemen and goons for recovery of their dues even from a defaulting party," the High Court had observed. The High Court order had come on a petition filed by Shanti Devi Sharma, the deceased's mother, seeking a probe against the ICICI bank and its staff for the unlawful action, which led to the suicide of her 34-year old son Himanshu Dev Sharma. Sharma had committed suicide in October 2005 by hanging himself at his house after he was allegedly intimidated and humiliated in front of his neighbours and family by recovery agents employed by the bank for recovering the loan amount taken for his motorcycle. The ICICI Bank had contended that it was within its rights to recover loans and had followed the required procedure for recovering dues. Keep these rules in mind while facing a loan recovery agent Know the facts Banks may have an in-house collection department or they may outsource the job to a third-party collection agency. Keep in mind that no bank likes non-performing assets, or bad debts, on their balance sheet. A debt becomes bad when it’s not paid for three consecutive months. “Usually if the debt is unpaid for a month, the collection team sends reminders or calls up the customer for recovery. However, the delay in payment could just be an oversight on the borrower’s part,” said a senior banker with a private sector bank, who did not want to be named. “But when the debt becomes 90 days overdue, we initiate recovery agent visits.” This, however, depends on a bank’s policy. In case you are unable to repay on time, it’s best to tell the bank about your situation. If you have a genuine reason, the bank may be willing to work towards a solution. This also depends on the bank’s policy. “A credit card debt can be easily converted into an EMI instead of total loan outstanding amount,” said the senior banker cited above. “The bank may even restructure a loan in some cases. Of course, this also depends on your past payment record.” Handling agents Keep in mind that at times recovery agents have big targets to achieve and may also have incentives linked to the number and volume of collection. So they are a motivated lot and handling them isn’t easy. Know the rules: You, as a debtor, have certain rights. Knowing those rights will help you handle a recovery agent. Identity: You can ask the recover agents to show their identity cards issued by the bank or under the authority of the bank. Privacy: You have a right to privacy. The recovery agent cannot discuss the debt to another person. So don’t panic if he threatens to tell neighbours or co-workers about your debt. If he does so, you can file a complaint against him with the bank. Time: The recovery agent should contact you between 7am and 7pm. However, if your working hours or work shift does not permit this, you may be contacted beyond this time limit. Calls: You can choose the place and time for receiving recovery calls. You can also request them to not call you at a particular place or time. For instance, if you don’t want to receive calls at work, specify the same to the agent or the bank. Keep in mind, they will respect your request only till they feel you are not avoiding them. Decency: The recovery agent has to talk to you in a decent and civilized manner. No abusive language should be used. Also, the written communication sent by the banks should be easy to understand. Investigation: If you file a complaint against a recovery agent, the bank needs to investigate the matter. This makes recovery agents accountable for their collection practice. Inappropriate occasions: If there is a death in your family or any such event, you can tell the agent not to call you or make visits for a few days. Records: Banks document the content of conversations between customers and agents along with the time and number of calls. Banks also need to keep all copies of communications sent to customers. Disputes: If you face any dispute or differences regarding dues, seek assistance of the lender. Seeking help There could be various reasons for you not being able to pay instalments on time— medical conditions, job loss or a twin-income family becoming a single-income household. Macroeconomic factors such as high inflation or rising interest rates, too, can be the reasons. If the reason for non-payment is not temporary, it’s best is to approach credit counselling agencies and seek help. “We provide free credit counselling for those who are struggling to get out of debt,” said Narayanan Raja, chief executive, BCSBI. Debt counselling agencies such as Abhay and Disha also offer such services for free. If you are uncomfortable going to these centres, you can avail counselling over telephone which also is provided without any cost. Recourse if harassed If you think the agent is not following any of the above mentioned rules, you should file a complaint. Raja said, “If a borrower thinks he is being harassed, he should first approach the bank, and if not satisfied by its response, he should get in touch with the banking ombudsman.” Though rules have been laid down to assist borrowers, it is best to rework household budget and make provisions to accommodate the unseen change in the repayment amount. The bank can sue you on defaulting the credit card payment. It cannot amount to criminal liability as it would be considered as non payment of loan which will constitute as a civil act by nature. The Banks and Financial Institutions can lend money even without security, normally, the Banks and Financial Institutions insist for security for the repayment of loan. The fixed assets, receivables etc. can be securities acceptable to the Banks and Financial Institutions for sanctioning the loans. The loan entitlements, the procedure for sanctioning the loan, the security issues etc, are exclusively governed by the guidelines/norms issued by the Reserve Bank of India. Loan being an agreement or understanding between the Bank and the borrower, the general laws like Law of Contract, Transfer of Property Act, Specific Relief Act, Specific Performance etc., are applicable to all banking transactions depending upon the nature of transaction. When a borrower fails to repay the money to the Bank, what the Bank can do for recovering the loan is to file a civil suit earlier. in India the remedy available to lenders has been to file an ordinary money suit for recovery against the defaulting borrower for the outstanding amounts or to file a summary suit as provided for under Order 37 of Code of Civil Procedure 1908 RBI CIRCULARS LINK - Recovery Agents engaged by Banks https://www.rbi.org.in/CommonPerson/english/scripts/Notification.aspx?Id=347 Complaints against the bank / its recovery agents 3. Banks, as principals, are responsible for the actions of their agents. Hence, they should ensure that their agents engaged for recovery of their dues should strictly adhere to the above guidelines and instructions, including the BCSBI Code, while engaged in the process of recovery of dues. 4. Complaints received by Reserve Bank regarding violation of the above guidelines and adoption of abusive practices followed by banks’ recovery agents would be viewed seriously. Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a particular area, either jurisdictional or functional, for a limited period. In case of persistent breach of above guidelines, Reserve Bank may consider extending the period of ban or the area of ban. Similar supervisory action could be attracted when the High Courts or the Supreme Court pass strictures or impose penalties against any bank or its Directors/ Officers/ agents with regard to policy, practice and procedure related to the recovery process.
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