What Happens If Your Personal Loan Becomes NPA?

A Non-Performing Asset (NPA) is a term commonly used in the lending and financial sectors to describe loans or advances that have not been repaid within the agreed time frame. In simple terms, an NPA refers to a loan where the borrower fails to meet the scheduled repayments, leading the lender to classify it as an asset that is no longer generating income.

This situation not only impacts the lender but also adversely affects the borrower’s creditworthiness.

This article explains when a personal loan becomes an NPA, the types of NPAs, and the actions lenders may take to recover dues.

When Does a Personal Loan Become Classified as NPA?

A personal loan becomes classified as an NPA when the borrower fails to make timely payments for an extended period. According to the Reserve Bank of India (RBI), a loan is typically classified as an NPA if the repayment of the principal or interest is overdue for more than 90 days. This means that after 90 days of non-payment, the loan will be recognised as non-performing, and the lender may initiate recovery proceedings for the outstanding amount.

Types of Non-Performing Assets (NPA)

The NPA classification of personal loans is based on the duration of the default:

• Substandard Assets:

  These are loans that have remained non-performing for less than 12 months. In this case, the borrower has failed to meet the repayment schedule, but the asset is still within a relatively short time frame for recovery.

• Doubtful Assets:

  If a loan remains non-performing for more than 12 months, it is classified as a doubtful asset. Lenders consider these loans to be higher risk, and they may need to make provisions for potential loss based on the possibility of recovery.

• Loss Assets:

  When a loan is considered uncollectible or is written off after prolonged default, it is classified as a loss asset. At this point, the lender believes that it is unlikely to recover any or most of the outstanding amount.

Mitigating at the First Instance

When a personal loan is at risk of becoming an NPA, the lender generally initiates damage control measures at the earliest stage. This includes contacting the borrower via phone calls, emails, or official notices, encouraging them to clear the overdue payments. The notice typically gives the borrower 60 days to settle the outstanding amount. This step is designed to remind the borrower of their obligations and resolve the issue amicably before taking further legal steps. Sometimes, lenders offer temporary relief or restructuring options, such as an extension of the loan tenure or reduction in monthly payments, to help borrowers who are temporarily unable to make full payments.

Potential Legal Action

If the borrower fails to repay the loan after multiple attempts to resolve the issue, the lender may file a lawsuit in the court of the appropriate jurisdiction. The lawsuit will seek a legal judgment on the repayment of the outstanding debt. If the court rules in favour of the lender, an attachment of the borrower’s assets may be approved to recover the outstanding dues.

Approaching the Debt Recovery Tribunal

For high-value loans, typically above INR 20 lakhs, lenders have the option to approach the Debt Recovery Tribunal (DRT). Established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the DRT was created to streamline and expedite the loan recovery process.

The DRT will conduct hearings, and if necessary, can appoint a receiver to sell the borrower’s assets in order to recover debt.

Rights of a Defaulting Borrower

In the event of loan default, borrowers retain certain rights to ensure fair and lawful treatment:

• Right to Notice:

  Lenders must issue a 60-day notice before initiating recovery actions, giving the borrower time to repay or negotiate.

• Right to Humane Treatment:

  Lenders and recovery agents are prohibited from engaging in harassment or intimidation, ensuring respectful interactions with borrowers.

• Right to Privacy:

  Borrowers' privacy must be respected during recovery efforts; agents can contact them only at designated times and places.

• Right to Be Heard:

  Borrowers have the opportunity to present their case and objections during the recovery process, ensuring their perspectives are considered.

• Right to Raise Complaints:

  If you believe that a lender or recovery agent is acting unfairly, you have the right to lodge a complaint with the lender, approach the police, or seek relief through a civil court. Additionally, regulatory authorities are in place to monitor and address such issues.

These rights are designed to protect borrowers from unfair practices and ensure a transparent, respectful recovery process.

Conclusion

A personal loan becomes classified as an NPA when the borrower defaults on repayment for more than 90 days. While lenders have multiple avenues for recovering outstanding dues, borrowers also have legal rights to challenge excessive actions or request restructuring. Understanding the NPA process helps both borrowers and lenders navigate the complexities of loan repayment and recovery more effectively.

At SMFG India Credit, we offer personal loans of up to INR 30 lakhs* to support a wide range of personal and business needs. Our competitive interest rates and flexible repayment tenures of up to 60 months* help keep EMIs manageable. Additionally, our user-friendly online portal and dedicated customer support ensure you stay informed about your repayment status. Apply online today or visit your nearest branch for more information.