What can happen in personal loan default?

What can happen in personal loan default?

A personal loan is an unsecured loan which can be anything from an Individual borrowing money for personal needs to making investments in a company. Many people take out personal loans to cover unexpected expenses or to consolidate their debts. A personal loan can be a good option if you have a good credit score and income. However, if you default on your personal loan, there can be serious consequences.

If an individual fails to repay the loans according to the initial agreement, it is a personal loan default. An Individual becomes a Personal Loan Defaulter when they miss making multiple payments for several weeks or months in a row.

A Personal Loan once taken must be repaid on time as it might harm the Credit Score of the Individual. When it is not repaid on time, the Bank or the NBFC has the right to notify the Individual to pay it on time. If the Individual ignores such notices, legal action will be taken against the Individual.

What happens if a personal loan is not paid on time?

Being an unsecured loan, when a personal loan is not paid on time in India, the Individual must face the Personal Loan Defaulter’s punishment in which they will be placed on the loan defaulters list. This creates a problem for the individual as it becomes considerably difficult in obtaining loans in the future.

When there is a personal loan default, there are different steps through which the bank starts acting toward the defaulter.

Step 1 – Issuing a Notification:  

When the Individual has become a loan defaulter, the lender issues a notification to alert the Individual to repay the loan. This usually happens after the first or second missed payment. So, the lender hires an agent usually who will contact the individual through calls or messages to notify them to make the payment.

Step 2 – Negotiations: 

Negotiations are possible with the lender. If the reason of the defaulter is genuine, they can negotiate by either halting the EMIs for a period of time or reducing the payment amount temporarily.

Step 3 – Post-Dated Cheques: 

If an individual starts ignoring the notices, the lender has the option of issuing notices stating that the individual’s post-dated cheques will be presented to the bank on a particular date. But as per the RBI Guidelines for Personal Loan Defaulters, a bounced cheque is a criminal offense, the individual can be charged as a Criminal under Section 138 of the Negotiable Instruments Act of 1881.

In such situations, the individual should assess their situation and talk to their lender, explaining their situation. This is far better than ignoring it. There are options that may assist your circumstance like refinancing. Cutting back on unnecessary expenses may also help in freeing up money to put towards repaying the loans.

Biggest Loan Defaulters of India:

It’s not only the general public that default on loans, commercial loans taken out by big corporations can also fall into this category. Some companies in India are owing around Rs. 58000 crores to various lenders/lending institutions. There are more than 25 people in India who are the biggest Loan Defaulters the country has ever seen.

Mehul Choksi, who promoted Gitanjali Gems owes a loan of Rs. 7,110 crores which yet to be repaid by him. Era Infra Engineering Ltd. owes their Lenders around Rs. 5,879 crores. On the third place, Concast Steel is the company which owes Rs. 4,107 crores to their lenders. REI Agro Ltd. owes Rs. 3,984 crores and ABG Shipyard Ltd. owes 3,708 crores to be repaid to their lenders.

As the study shows, there have been around 2700 Loan Defaulters in the Financial Year 2022 which is lower than the previous year which was around 2800.

biggest loan defaulter of india

All figures in crores and as on march 31 Source: RBI, Rajya Sabha

What is the cost of borrowing which increases the debt-burden?

The increase in the debt burden of borrowing comes at a cost. As people below the poverty line receive informal credit, whereas people above the poverty line receive formal credit. Since the cost of borrowing is high when it comes to the people below the line, a large part of their earnings is likely used to repay the loan. Also, the rate of interest is high for people below the line, making it likely that they will fall into a debt-trap. The interest rates on personal loans differ from bank to bank, but the average rate of interest is around 10% p.a.

The impact that is created on the borrowers due to the higher cost of borrowing is that there is often a situation in which the individual’s monthly repayments are greater than their disposable income. This inevitably leads to financial difficulties and the risk of defaulting is high.

Usually, public sector banks have the lowest rate of interest on personal loans which can go up to around 8% p.a.

The reason behind banks charging high-interest rates on personal loans is due to them having a higher default rate, as there is no asset security, the lender is relying on the borrower to pay back the loan at the bank’s risk. The bank is trying to avoid the borrowed amount becoming an NPA (Non-Performing Assets) which is basically a bad debt and creates problems for the banks in the eyes of their governing body, The Reserve bank of India. Banks charge higher interest rates on Personal and Educational Loans as they are Unsecured Loans which are given based on credit history and repayment capacity. Also, there is no opportunity of a mortgage when it comes to Personal Loans. The interest is also charged so that the Banks can pay their depositors.

What is the Legal Action against Personal Loan Defaulters?

When it comes to the Repayment of a Loan, even if there is a Breach of Contract, it isn’t a crime. The lenders can approach a Civil Court for them to recover the loaned amount.

If the loan hasn’t been repaid by the Individual within 180 days, the Lender is allowed to file a case against the Individual under Section 138 of the Negotiable Instruments Act of 1881.  

According to RBI, a wilful defaulter is one who defaults despite having the capacity to pay, diversifies the loans or funds, or disposes/transfers the collateral which had been provided as security without the knowledge of the lender. If before the beginning of the Loan Agreement, the intention of the Borrower turns out toremai be fraudulent, a criminal case could be filed against the Borrower.

What are the Rights for the Personal Loan Defaulters?


Even though there are different legal actions or illegal practices taken towards Loan Defaulters, there are also provisions made for Rights for the Loan Defaulters to guide them through the process.

Following are the Rights provided for the Personal Loan Defaulters:

1. Right to Notice:

The Borrower has to be given enough time by the lender before the lender decides to take action against the borrower or repossesses the asset provided as collateral.

2. Right to Fair Value:

When the assets are repossessed by the lender, the value cannot be decided by the lender. A Fair Price must be valued and informed to the Borrower before revaluated.

3. Right to be Heard:

When the notice has been issued by the lender regarding the repossession, the Borrower can raise an objection at such a point.

4. Right to Claim the Balance:

In a scenario, when the Lender/Lending Institution has gotten a higher price from the repossessed asset, the Borrower has to the right to claim the amount which is left in the balance of the asset.

5. Right to be Treated Politely:

Whenever the loan is being recovered, the Borrower cannot be mistreated, humiliated, or abused during the process.

These rights help the loan defaulters to manage everything easy and smoothly.

What is the process of recovery of Personal Loan?

When the Borrower is unable to repay the loan, the lender/lending institution initiates a Loan Recovery process. This process consists of 2 steps.

Step 1 – A non- judicial route – This method is basically when the lenders take matters into their own hands and through the help of Recovery Agents try to pressurize the Borrowers, hurting the Borrowers physically and mentally.

Step 2 – A judicial route – This method is when the lender sends a legal notice wherein the Borrower has to repay the loan at the given time or legal action would be taken.

It is generally that the Banks and Lender/Lending Institutions understand that Borrower is on the verge of defaulting when they start behaving differently than they usually do. The process of recovering a loan from the Borrower will vary from one lender to the other. The Lender tries to help the Borrower by increasing the terms of repayment or if that method doesn’t work then, the Borrower’s assets are seized. And as a last resort, Lenders either write off the loans or declare the Borrower as a Non-Performing Asset (NPA).

Who Benefits more during Inflation Borrowers or Lenders?

Inflation happens when there is general rise in the prices but a fall in the purchasing power of goods and services. Money is the factor which creates the purchasing power needed to purchase goods and services. Money has a direct, proportional relation with price levels when it is long term.

Inflation plays a big role when it comes to being beneficial for the Borrowers and the Lenders. During Inflation, it becomes beneficial for the Borrowers as they end up paying the lenders much less the amount they had originally borrowed. This is a financial benefit for the Borrowers.

As for the Lenders, Inflation is also beneficial for them. Inflation can cause the prices to become high and the interest rates to go higher which creates a demand for the credit line which in the end, benefits the Lenders.

What do you do when you have a personal loan default?

When there is such a situation when you are stuck in a Default of a Personal Loan, the Individual needs to take immediate action with a calm mind by the help of a proper Debt Management Plan to help you through your expenses and help you live a stress & debt-free life.

We discussed the most common types of Personal Loan Default problems and their significance in this blog. So, if you’re looking for a way to stop your debt problems or wanting to improve your Cibil Score, SingleDebt is a great place to start by helping you get a debt-free solution.    

Credit card default is the costliest mistake a person can ever make which is not easy to fix. A poor credit score on your credit report indicates that you have debt, and this may result in permanently damaging your credit report, and even make it impossible to obtain further loans.

A default on your credit record could be one of the factors that prevent you from getting a new loan.

Even so, in a few cases where the bank finds out even after years of lending money and is unable to recover it from borrowers, there is a chance it can write off your debts. This means that a certain amount will be recovered from the bank and the rest will be written off.

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