What Happens if Personal Loan is Not Paid in India?

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.

Conclusion

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.