Defaulting on Loans
Loan defaults and frauds are the major reason behind unpaid loans in India today.
Lenders in India believed lending to applicants is risk-free when they have a good credit score and a stable source of income. But the recent slowdown in the Indian economy, vanishing jobs and reduced employment opportunities in the country has led to a rise in the number of loan defaulters. Even if you leave the small defaulters, there are some big defaults such as 2019, Allahabad Bank was defrauded by Bhushan Power & Steel (BPSL), and Punjab National Bank (PNB) also reported fraud by BPSL amounting to ₹3,800 crores and recently it was the PMC bank crisis. As of now, approximately 12 companies are responsible for 25% of all non-performing assets (NPAs). However, these were the big defaults that affected thousands of people across the country as they were having their savings accounts in these banks.
Delays in salaries, job loss, and business downturn are the top reasons for debt defaults in the country. The major loans which people opt for in India are- Personal loan, Home loan, business loan, car loan, and student loan. These loans have been divided into two categories, one is a secured loan and the other one is the unsecured loan. Loans like personal loans, student loans, and business loans fall in the category of the unsecured loans whereas loans like car loan, home loan comes under secured loans.
Consequences of Loan Defaults
- Additional charges and penalties.
- Drop-in credit score.
- Harder to qualify for future credit.
- Loses ownership of the collateral.
- Lots of stress and tension.
When you apply for a home loan, car loan which comes under the secured loan, you need to pledge guarantor or collateral against your borrowing. This is done to minimize the risk from the lender’s end. These loans are of huge amount and it’s difficult to trust the applicant based on their CIBIL and income, so to secure for the repayment lenders do ask for collateral and guarantor. Collateral pledged can be an asset such as any real estate property, equipment or machinery which belongs to you.
In case of loan default lenders first, send you a message and notice.
In case of loan default for one to two months, penalties are charged.
When you are not able to repay the loan for more than 3 months, the bank will send you a legal notice and legal processing may start if you don’t take any considerable step. The court will provide you a period to repay the loan, in case you are not able to utilize that time, your property will be considered as NPA (non-performing asset). Further, the ownership of your property will go to the lender and they will have the full authority to sell it and recover the money.
It relies upon your lender/bank and the terms & condition of your loan.
Lenders generally consider a personal loan default when it has not been repaid for more than 30 days. However, the terms and conditions vary and it may also vary from 60 to 90 days.
Frequently, a moneylender won’t report a reimbursement as late to a credit agency until around 30 days after it was expected. That implies that more often than not, any reimbursement under 30 days late won’t hurt your financial assessment. To realize your advance’s particular terms for default, check your credit agreement or contact your loan specialist. If not repaid for more than 90 days legal action can be taken against you as mentioned in your loan agreement.
Top Reasons for Loan Defaults in India
Delay in Salary
Delay in salary is the most common reason behind 30% of the loan defaults in India. Whether you are in a government job or a private job salary delay is common. So, a borrower is left with no other option to repay the loan when their salary is delayed for more than a month.
As the Indian economy has been slowing down, the number of job losses have increased and in such a case borrow is left with no money to repay his/her ongoing loan.
Loss in Business
Business is something where nothing is sure, and most of the business owners take a business loan for the smooth functioning of their venture. In case of any failure, the repayment of the loan becomes tough and at last, it leads to loan default.
This is also one of the major reasons why loan default happens in India. It might sound unrealistic to you but this is true, some take loans with a pre-planned intention of not to repay it. Though it is difficult to qualify for a loan without having proper documents still some manage to do it. Some become underground so that the lender can’t contact them or recover the borrowed amount from them.
This is most common in business loans, as business loans are unsecured and only high amount business loan required collateral, so in case of fraud borrowers don’t pledge collateral equivalent to their borrowed amount and later they don’t repay.
In order to reduce the defaults in India, lenders need to tighten their loan eligibility and have a thorough check of the applicant’s repayment history and job security. Moreover, in the case of business loans, lenders need to be more sure about the repayment before they lend.