If you are stuck in such a situation, here is what to do.
Mr. Aniket Verma, a young professional, secured an education loan from a Non-Banking Financial Company (NBFC) called ‘Apex Edu-Finance’ in early 2023 to pursue higher studies in Eurasia. He was diligently paying partial EMIs while searching for employment. Unfortunately, his family’s situation took a turn for the worse when their long-standing business in the city of Alipur had to be shut down in early 2024. Consequently, other financial institutions seized their assets to recover their dues.
Now, Aniket is without a job and has no financial means to continue repaying his education loan. He is worried about the consequences of defaulting, specifically how it might impact his residency status in Eurasia and whether he could face legal trouble, such as being detained at the airport, if he decides to visit his family in India.
Advice in such cases
Facing a loan default can be stressful, but understanding your options is the first step toward resolving the issue. Here is some general advice:
Review the Loan Agreement: Carefully read all the terms and conditions of your loan agreement with the NBFC. Pay close attention to clauses related to default, penalties, and the liability of co-borrowers or guarantors.
Communicate with the Lender: Do not ignore calls or notices from the lender. Proactively communicate your financial situation in writing. Explain the circumstances leading to your inability to pay, such as job loss and family financial crisis. This shows your intent to repay, even if you are currently unable to.
Negotiate a Solution: Lenders are often open to negotiation. You can request options such as a moratorium period, loan restructuring (extending the tenure to reduce the EMI), or a one-time settlement (OTS) for a reduced amount.
Document Everything: Keep a record of all communication with the lender, including emails, letters, and notes from phone calls. This documentation can be crucial if the matter proceeds to a legal forum.
Understand Your Rights: Be aware that recovery agents appointed by the lender must operate within the legal framework established by the Reserve Bank of India (RBI). They cannot resort to harassment, intimidation, or threats.
Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think
Applicable Sections of Law
An education loan default is primarily a civil matter, governed by contract law and specific banking regulations. Criminal proceedings are not usually initiated for a simple default.
The Indian Contract Act, 1872: The loan agreement is a contract between you and the lender. A default is a breach of this contract, giving the lender the right to seek legal remedies for recovery.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002: If your loan is secured by any property (collateral), the lender can initiate proceedings under this Act to take possession of and sell the asset to recover the outstanding amount, typically after the account is declared a Non-Performing Asset (NPA).
The Recovery of Debts and Bankruptcy (RDB) Act, 1993: Lenders can file an application for recovery of their dues with the Debt Recovery Tribunal (DRT) if the amount is above the prescribed limit.
Bharatiya Nyaya Sanhita, 2023 (BNS): While loan default is civil, if the lender alleges that the loan was obtained using fraudulent means (e.g., forged documents, false information), a criminal case for cheating under Section 318 of the BNS could be filed. However, this requires proof of dishonest intention from the very beginning.
If you are the complainant
If you are the lending institution (the complainant), the typical course of action is as follows:
Issue Notices: The first step is to send formal communication, including reminders and a loan recall notice, to the borrower and any guarantors, demanding repayment.
Declare NPA: If payments are overdue for more than 90 days, the loan account is classified as a Non-Performing Asset (NPA) as per RBI guidelines.
Initiate Recovery Proceedings: Depending on the loan amount and whether it is secured, the lender can file a case in the Debt Recovery Tribunal (DRT) or a civil court. If the loan is secured, action under the SARFAESI Act can be initiated.
File a Civil Suit: A suit for recovery of money can be filed in the appropriate civil court having jurisdiction.
Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think
If you are the victim
If you are the borrower (often feeling like the victim of circumstances), here are the steps to take:
Do Not Panic or Ignore: Ignoring legal notices will not make the problem disappear. It will only weaken your position and may lead to an ex-parte (one-sided) decree against you.
Respond to Notices: Draft a formal reply to any legal notice received, preferably through a lawyer. In the reply, state your financial difficulties and express your willingness to find an amicable solution.
Gather Your Documents: Collect all documents related to the loan, including the sanction letter, agreement, all payment receipts, and any correspondence with the NBFC.
Explore Settlement: Actively pursue a settlement with the lender. A One-Time Settlement (OTS) is often a viable option where you pay a lump sum that is less than the total outstanding amount.
Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think
How the police behave in such cases
The police have no role in a straightforward case of loan default, as it is a civil dispute arising from a breach of contract. Police intervention is only warranted if there is a criminal complaint. For instance, if the lender files an FIR alleging that the borrower submitted fake academic certificates or income proof to obtain the loan, the police would then investigate the crime of cheating or forgery under the BNS. In a simple default scenario, the police will direct the lender to approach the appropriate civil court or tribunal.
FAQs people normally have
Can I be arrested for defaulting on an education loan?
No, you cannot be arrested for simply failing to repay a loan. It is a civil offense. Arrest is not a remedy for the recovery of a loan. The only exception is if a criminal case of fraud is proven against you, which is a separate and more serious matter.Will a loan default in India affect my foreign residency?
A civil loan default in India does not directly impact your residency or visa status in another country. Foreign governments are generally not concerned with your civil financial disputes in your home country. However, if a criminal case is filed and a non-bailable warrant is issued, it could create complications.Can I be stopped at the airport when I travel to India?
You cannot be stopped at the airport for a civil loan default. Travel restrictions, such as the issuance of a Lookout Circular (LOC), are typically reserved for serious criminal cases where the accused is absconding. A bank or NBFC cannot unilaterally have you detained at immigration for a loan default.What happens to the co-borrower or guarantor?
The co-borrower and/or guarantor are equally and severally liable for the repayment of the loan. The lender has the legal right to initiate recovery proceedings against them in the same manner as they would against the primary borrower.
What evidence is required?
For the lender (complainant), the primary evidence includes:
The original loan agreement signed by the borrower and guarantor.
A detailed statement of the account showing the disbursed amount, repayments made, and the outstanding balance with interest.
Copies of all notices sent to the borrower.
For the borrower, the necessary evidence includes:
A copy of the loan agreement.
Proof of all EMI payments made.
All written communication with the lender, including emails and letters.
Documents supporting the claim of financial hardship (e.g., termination letter, documents related to the family business closure).
How long will the investigation take?
Since loan default is a civil matter, the term “investigation” does not apply in the same way as in a criminal case. The process is one of adjudication. The timeline for a recovery suit in a civil court or a DRT can be protracted. It can take anywhere from several months to a few years to get a final order, depending on the complexity of the case, the court’s backlog, and the legal procedures involved.
Advocate Sudhir Rao, Supreme Court of India