What Happens if My Personal Loan Becomes NPA?

Taking out a personal loan can be a great way to meet your financial needs. Still, it also comes with the responsibility of timely repayments.

If you fail to make these payments, the loan can turn into a Non-Performing Asset (NPA), which could lead to serious consequences.

Understanding what an NPA is and the process that follows can help you take proactive measures to avoid this situation.

What is an NPA?

A Non-Performing Asset (NPA) refers to a loan or credit that has not been repaid within the stipulated time frame. It occurs when the borrower defaults on the loan, meaning they miss multiple payments or fail to repay for an extended period.

In the case of personal loans, an NPA is declared when the borrower misses several consecutive Equated Monthly Instalments (EMIs), making the loan non-performing for the lender.

The classification of NPAs is divided into three types based on the duration of non-performance:

1. Sub-Standard Assets: A loan is classified as sub-standard if it remains an NPA for up to 12 months. This classification indicates that the borrower is experiencing financial difficulties, and there is a possibility that the loan might be repaid with some effort.
2. Doubtful Assets: If the loan remains unpaid for over 12 months, it is considered a doubtful asset. At this stage, it is highly unlikely that the debt will be recovered because the borrower's financial situation has worsened, and they may be unable to repay.
3. Loss Assets: When a loan is considered uncollectible or has no value left, it is classified as a loss asset. While it may still have some recovery value, it is no longer a viable asset for the lender.

What Happens After NPA?

Once your loan becomes an NPA, the lender begins the management of non-performing assets. That means the lender will take specific steps to recover the outstanding debt. The process may vary depending on the lender's policies, but generally, it follows a systematic procedure.

1. Notice and Initial Communication

The first step in the recovery process is for the lender to send a notice to the borrower. This notice typically gives the borrower 60 days to settle the overdue amount. During this period, the borrower can communicate with the lender and explain their situation.

If you have financial difficulty and cannot repay the loan, it's important to contact the lender immediately. By discussing your challenges, you may be able to negotiate a settlement or restructure the loan.

2. Legal Action and Lawsuit

If the borrower does not respond or repay the dues within the 60-day notice period, the lender may initiate legal proceedings. The lender will file a lawsuit in a court of appropriate jurisdiction to recover the amount. Once the case is heard in court, and if the lender receives a favourable judgment, the court may approve the attachment of the borrower's assets to recover the outstanding debt.

At this stage, the lender is taking the matter seriously, and legal action becomes the primary means of recovering the funds.

3. Debt Recovery Tribunal (DRT)

For loans exceeding a certain amount (typically above Rs 20 lakh), the lender can approach the Debt Recovery Tribunal (DRT). The DRT was established under the Recovery of Debts Due to Banks and Financial Institutions Act 1993 to expedite recovering loans.

The DRT will conduct hearings and, if necessary, appoint a receiver to sell the borrower's assets to recover the debt. This option is available only for larger loans and is typically faster than going through the regular court system.

Collateral and Set-Off Rights

One of the unique aspects of unsecured personal loans is that they don't require collateral like a home or a car. However, this doesn't mean the lender has no recourse to recover the dues. Many lenders may place a lien on the borrower's assets, such as fixed deposits or mutual funds.

That means these assets cannot be sold until the outstanding debt is cleared. The lender may also offset the outstanding loan amount from the borrower's savings or fixed deposit accounts.

Borrower Rights During the Recovery Process

Even if you default on a personal loan, you still have rights during the recovery process. These rights are designed to protect you from unfair or aggressive recovery practices. Some of the rights include:

1. Right to Sufficient Notice: The lender must provide you with adequate notice before taking any legal action. This notice period allows you to clear the dues or settle the matter amicably.
2. Right to Be Heard: You can present your side of the story if the case goes to court or a Debt Recovery Tribunal. You can provide any relevant information or documents that support your case.
3. Right to Humane Treatment: Recovery agents or lenders cannot harass or intimidate you. Any coercion, verbal abuse, or threats are illegal and can be reported to the authorities.
4. Right to Report Grievances: If you feel that the lender or recovery agents are treating you unfairly, you can file complaints with the lender, the police, or the civil court. There are also regulatory bodies that oversee such practices.

Conclusion

Having a personal loan become an NPA can have severe consequences, including legal action, asset attachment, and damage to your credit score.

However, you can avoid this situation by understanding the process and staying proactive in managing your repayments.

Open communication with your lender and exploring settlement options early on can help you navigate the difficulties of default and find a solution that works for both parties.