Education loans provide major financial support for students aspiring to pursue higher education abroad or in India. They help cover expenses such as tuition fees, books, and living costs. However, a repayment plan for education loans is essential to be prepared in advance so that you can maintain a healthy credit score and financial stability. To ensure a fair and transparent recovery process, the Reserve Bank of India (RBI) has established specific guidelines for both lenders and borrowers just like the RBI guidelines on education loans. Let’s understand the RBI guidelines for loan recovery.
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What is Loan Recovery?
Loan recovery is the process undertaken by lenders to collect unpaid debts and overdue. When borrowers fail to repay their education loans or any other loan within the stipulated timeframe, the banks or lending institutions may deploy recovery agents to recover the outstanding balance. This process is critical as it affects the borrower’s credit score and future loan eligibility. The RBI has laid down guidelines to ensure that this process is conducted fairly and ethically.
Also Read: Want an unsecured education loan? Check here all about RBI Guidelines on Collateral Free Education Loans
Loan Recovery Process
The loan recovery process involves several stages. For example, if you miss paying EMI for one month, the lender will apply bounce charges, late fees, etc and will send you reminders through texts, calls and emails. If you have missed 3 EMIs in a row, your account will be considered as NPA and the lending institution may transfer the recovery to the collection agency which will contact you for the repayment. Check some important steps involved in loan recovery:
Negotiated Settlement
Recovery agents can negotiate directly with borrowers to establish a settlement. This might involve repaying the debt in a lump sum or agreed-upon instalments so that the borrower can find it easier to manage the repayment. In the negotiation process, the lending institution may also waive the additional charges.
Legal Notice
If negotiations fail and the borrower has still not started paying the dues, recovery agents may issue a legal notice to the borrower demanding repayment within a specified period. This notice serves as a formal warning before any legal action is initiated. This will have a serious impact on the credit score of the borrower so you should also understand RBI regulations on Credit Report.
Debt Recovery Tribunals (DRT)
DRTs are specialised forums established under the Recovery of Debts Due to Banks and Financial Institutions Act of 1993. They handle cases involving the recovery of debts and offer a faster resolution compared to traditional civil courts. This may involve a loan settlement offered in a Lok Adalat in front of a judge or a magistrate. In such situations, the bank negotiates with the borrower offering fee waivers, lower interest rates etc.
The SARFAESI Act
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act allows banks and financial institutions to seize and sell secured assets of defaulting borrowers without judicial intervention subject to terms and conditions. This will be effective for all types of secured loans. However, If borrowers are struggling to repay their loans, they should communicate with their bank and request an education loan restructuring or a moratorium period.
Also Read: Check here some of the most common FAQs on the Restructuring Scheme of RBI
RBI Guidelines for Loan Recovery Agents
The RBI has set forth guidelines to regulate the conduct of loan recovery agents to ensure they follow ethical practices. Sometimes there are genuine reasons for the borrower due to which they fail to repay EMIs on time. In such cases, the recovery agents shall act fairly and ethically and should not harass the borrowers. If they do, the borrower can file a complaint with the lending institution as well as the RBI Ombudsman Scheme.
Fair Recovery Processes
The recovery process must be fair and not punitive. Agents should refrain from using force, coercion, or abusive language. Some agents harass the borrowers by texting and calling using abusive language and threatening to tell neighbours and family members. In such cases, the borrower should take strict action and file a complaint immediately.
Proper Training
The RBI has instructed that the banks and financial institutions must ensure that their recovery agents are well-trained and follow ethical practices when dealing with borrowers. Complaints from borrowers must be addressed before involving recovery agents.
Harassment Prevention
The RBI explicitly prohibits any form of harassment, including abusive language or intimidation, during the recovery process. Borrowers should be treated with dignity and respect. The borrower should also be transparent about their situation and how soon they can close the loan by repaying all outstanding.
Privacy and Confidentiality
Lenders must protect the privacy and confidentiality of the borrower’s personal information. Information about the loan should not be disclosed to unauthorised parties unless required by law.
Debtor Rights
Borrowers have the right to be informed about the details of their outstanding debt, including the loan account status, interest rates, and any additional charges. All the information must be communicated to the borrower properly so that they can understand the charges levied by the lender.
Non-Performing Assets (NPA)
Any normal smoothly running loan amount is considered a standard loan account. However, the account status will change if you miss two or more consecutive EMI payments. Any account in which EMIs are not paid for 2 months will be considered an SSA (Sub-Standard Asset). The loan account becomes a Non-Performing Asset (NPA) when it remains unpaid for more than 90 days. The RBI defines NPAs as assets that no longer generate income for the bank. Check some important details regarding the same:
- After an account is declared NPA, it prohibits the banks from extending additional facilities to willful defaulters.
- Expanding the jurisdiction of Debt Recovery Tribunals to handle high-value cases can also be started.
- Implementing the Insolvency and Bankruptcy Code (IBC) to transform borrower-lender relationships is also a stage.
RBI guidelines for education loan recovery shall be understood by both borrowers and lenders. These rules promote transparency, fairness, and ethical recovery practices, safeguarding the interests of all parties involved. Before taking out an education loan, ensure that the lender adheres to RBI’s recovery guidelines. Check some FAQs regarding the same below:
FAQs on RBI Guidelines for Education Loan Recovery
The loan recovery process involves several stages. Initially, if a borrower misses an EMI payment, the lender will apply bounce charges and late fees and send reminders through texts, calls, and emails. If three consecutive EMIs are missed, the account is classified as a Non-Performing Asset (NPA), and the lender may transfer the recovery to a collection agency.
If a borrower defaults, recovery agents can negotiate a settlement with the borrower. The settlement usually includes repaying the debt in a lump sum or in agreed-upon instalments.
The SARFAESI Act, or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, is a legislation enacted in India to empower banks and financial institutions to recover non-performing assets (NPAs) without the intervention of courts. This act allows them to take possession of secured assets, manage or sell them to recover dues and enforce security interests.
The RBI has established guidelines to ensure loan recovery agents act ethically and fairly. Agents must not use force, coercion, or abusive language and should respect the borrower’s privacy and confidentiality.
Borrowers have the right to be informed about their outstanding debt, including the loan account status, interest rates, and any additional charges. They should be treated with dignity and respect, and their personal information must be kept confidential.
Borrowers facing difficulties in repaying their education loans should communicate with their bank as soon as possible. They can request an education loan restructuring or a moratorium period to ease their repayment burden.
To know more about education loans, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
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