If you are stuck in such a situation, here is what to do.

Mr. Rohan Sharma, a young professional from a town named Anandpur, found himself in a difficult financial situation. A few years ago, he had taken an educational loan of ₹3.5 lakhs from Vidya Finance Corporation to complete his engineering degree. Due to unforeseen circumstances and a challenging job market, he was unable to make regular repayments. Recently, he received a notice summoning him to appear before the National Lok Adalat for a settlement regarding the outstanding loan. He is now in a dilemma, wondering whether he should try to negotiate a one-time settlement for a reduced amount, say ₹2 lakhs, or arrange to repay the entire loan along with the accumulated interest. This situation is common, and understanding the legal implications and options is crucial.

Advice in such cases

Receiving a notice from a Lok Adalat can be stressful, but it is also an opportunity to resolve a long-pending dispute amicably and quickly. Here is some general advice:

• Understand the Forum: A Lok Adalat (People’s Court) is a form of Alternative Dispute Resolution. Its primary goal is to facilitate a compromise or settlement between the parties. It is less formal and much faster than a regular court.
• Evaluate Your Finances: Honestly assess your financial capacity. Can you afford to pay the full amount with interest? If not, a one-time settlement (OTS) might be a practical solution, even if it impacts your credit score.
• Prepare for Negotiation: The bank or financial institution is also looking to close the case and recover some of its money. They are often open to negotiation. Go prepared with a reasonable settlement offer based on your financial situation.
• Consider the Consequences: A settlement in Lok Adalat results in an “Award,” which is final, binding, and has the same legal force as a decree from a civil court. It cannot be appealed. Repaying the loan in full, while difficult, will reflect better on your credit history.
• **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

Loan default is primarily a civil matter governed by contract law. The relevant legal frameworks include:

• The Legal Services Authorities Act, 1987: This Act provides the statutory basis for the establishment and functioning of Lok Adalats in India. Chapter VI of the Act deals specifically with Lok Adalats.
• The Indian Contract Act, 1872: The loan agreement you signed is a contract, and its terms and conditions, including repayment obligations and interest, are governed by this Act.
• Recovery of Debts and Bankruptcy Act, 1993: This Act provides for the establishment of Debt Recovery Tribunals (DRTs) for the expeditious adjudication and recovery of debts owed to banks and financial institutions.
• Bharatiya Nyaya Sanhita (BNS), 2023: Generally, loan default is not a criminal offense. However, if the loan was obtained using fraudulent means, false documents, or with a dishonest intention from the very beginning, the lender could initiate criminal proceedings under provisions like Section 318 of the BNS for cheating.

If you are the complainant

In this scenario, the complainant is the lender (the bank or financial institution like Vidya Finance Corporation). Their objective is to recover the outstanding dues.

• Initiate Proceedings: The lender will first send demand notices. If the borrower fails to pay, they can file a pre-litigation application before the Lok Adalat to attempt a settlement.
• Negotiation Strategy: The bank’s representatives come to the Lok Adalat with a certain authority to negotiate. They aim to recover the maximum possible amount but are often willing to waive a portion of the interest or penalties to secure a settlement.
• Documentation: They will have all the necessary documents, including the loan agreement, statement of accounts, and proof of default, to present before the Lok Adalat panel.
• **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

In this context, the “victim” is the borrower who is unable to repay the loan and is facing legal action.

• Do Not Ignore the Notice: It is crucial to attend the Lok Adalat on the specified date. Ignoring the notice will allow the lender to pursue more stringent legal action, such as filing a civil suit for recovery, which is a more complex and expensive process.
• Gather Your Documents: Collect all your loan-related papers, including the sanction letter, agreement, any receipts of payments made, and all communication from the bank.
• Be Ready to Negotiate: Approach the Lok Adalat with a clear mind. Present your case honestly to the panel and the bank’s representative. Make a realistic offer for settlement that you can honour.
• Get Everything in Writing: If a settlement is reached, ensure that the terms, including the settlement amount and the timeline for payment, are clearly recorded in the Lok Adalat Award.
• **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 absolutely no role in cases of civil loan default. It is a dispute between a borrower and a lender. The police cannot arrest you or force you to make payments. Their involvement is only warranted if a criminal offense is committed. For instance, if recovery agents hired by the bank resort to threats, harassment, or force, you can file a police complaint against them for criminal intimidation (Section 351 of BNS) or other relevant offenses.

FAQs people normally have

• What happens if I don’t attend the Lok Adalat?
  

  The Lok Adalat cannot force a settlement. If you don’t attend or if no agreement is reached, the case is closed there. However, this gives the bank the right to file a regular recovery suit against you in a civil court or Debt Recovery Tribunal (DRT).

  
  
• Is the Lok Adalat award binding?
  

  Yes. An award passed by a Lok Adalat is final and binding on all parties. It is deemed to be a decree of a civil court and is not appealable.

  
  
• Will a settlement affect my credit score?
  

  Yes. When you settle a loan for a lesser amount, the bank reports it to credit bureaus like CIBIL as “Settled.” This is viewed negatively by future lenders compared to a loan account that is “Closed” after full payment.

  
  
• Can I pay the settlement amount in installments?
  

  This is a point of negotiation. You can request to pay the settled amount in installments, and if the bank agrees, this must be clearly mentioned in the final written award of the Lok Adalat.

  
  

What evidence is required?

For a Lok Adalat proceeding concerning a loan default, the following evidence is typically required:

• For the Borrower (You):
  • The Lok Adalat notice.
  • The original loan agreement and sanction letter.
  • Statement of your loan account.
  • Proof of any payments made by you.
  • Any correspondence with the bank.
  • Identity and address proof.
• For the Lender (Bank/Finance Company):
  • The original loan agreement and other related documents.
  • A detailed statement of account showing the principal, interest, and default.
  • Copies of all notices sent to the borrower.
  • An authorization letter for the representative appearing in the Lok Adalat.

How long will the investigation take?

For a Lok Adalat, the term “investigation” is not applicable as it is not an investigative body. It is a forum for settlement. The process is designed to be extremely quick. Your case will be presented before a panel (usually comprising a retired judge, a lawyer, and a social worker). They will hear both sides and encourage a settlement. The entire process for your case is typically concluded on the very same day the Lok Adalat is held. If a settlement is reached, the award is passed immediately. If not, the matter is closed, and the parties are free to pursue other legal remedies.

Advocate Sudhir Rao, Supreme Court of India