Loan Default Rights in India: What Every Borrower Must Know

By Advocate Ganta Surya Kiran | 19 Law Chambers, Visakhapatnam | Banking Law

Defaulting on a loan is stressful — but banks cannot do whatever they want. Indian law gives borrowers clear rights against arbitrary bank action, illegal recovery agent behaviour, and wrongful property seizure. Advocate Ganta Surya Kiran at 19 Law Chambers Visakhapatnam has protected borrowers’ rights across Andhra Pradesh.

What Happens When You Default on a Loan?

After 90 days of non-payment, the bank classifies your account as a Non-Performing Asset (NPA). The bank then follows a recovery process: demand notice, negotiated one-time settlement offer, and if unsuccessful — legal action under SARFAESI Act or civil court.

Your Rights Under SARFAESI Act

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) 2002 allows banks to seize and sell secured assets (mortgaged property) without a court order  but with strict procedural safeguards:

60-Day Notice: Bank must send a demand notice under Section 13(2) SARFAESI giving you 60 days to repay before taking possession of secured property.

Right to Respond: You can file a representation within 15 days of the notice disputing the amount or procedure. Bank must consider your response.

Right to Challenge Before DRT: If you dispute the bank’s action  file an application before the Debt Recovery Tribunal (DRT) within 45 days of possession notice under Section 17 SARFAESI. DRT can stay the bank’s action.

Right to Redemption: You can repay the entire outstanding amount and reclaim your property even after possession notice  until the final sale of the property.

Rights Against Recovery Agents

Recovery agents cannot: use abusive language or threaten you, visit your home before 7 AM or after 7 PM, contact your family members or employers without prior notice, use physical force or intimidate you, or disclose your loan details to unauthorized persons. File a complaint with the bank’s Grievance Redressal Officer, then the RBI Banking Ombudsman at cms.rbi.org.in if agents harass you.

Frequently Asked Questions

Q: Can a bank seize my property without a court order?
For secured loans (home loan, LAP)  yes, under SARFAESI after following procedure. For unsecured loans (personal loan, credit card)  no, bank must go to civil court or DRT. Always challenge SARFAESI action before DRT within 45 days.

Q: What if I cannot repay the full amount?
Negotiate a One-Time Settlement (OTS) with the bank. Banks are often willing to settle for 60-80% of outstanding dues to close NPA accounts. We assist borrowers in negotiating favourable OTS terms.

Q: Can I get free legal help for loan disputes?
Yes for eligible persons  NALSA — nalsa.gov.in. Also: Free Legal Aid in AP.

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