Avoid defaults on your home loan. If you default for some reason, don’t ignore communication from the bank

Ramesh was looking for a property in an upmarket location in Gurgaon. He had a cushy job in a multinational firm but was living in a rented accommodation. One fine morning, he saw an advertisement in a newspaper about a four-bedroom apartment in a condominium located in a posh area. “This is what I wanted,” Ramesh thought. A few days later, he visited a bank and applied for a home loan. It was for the first time that he had applied for any type of bank loan. The bank assessed his financial credentials and sanctioned him loan with an EMI of Rs 40,000 per month for the 15-year loan tenure.

For four to five months, Ramesh religiously paid his EMIs on time, but after that he became casual and irresponsible. The bank called Ramesh up to remind him about his liabilities, but his cavalier attitude did not change. He even paid no heed to the recovery agents who came to meet him for negotiation. He was capable to service the debt, but he was under the impression that the bank could do no harm.

His impression proved to be groundless. One day, a number of banks officials knocked at his door and handed over him a court notice which made it clear that his apartment was being attached by the bank and would be auctioned to recover the outstanding dues. As usual, the comeuppance was painful.

No standard process

Age-old financial wisdom has it that you should borrow only as much as you can afford to repay. But many homebuyers like Ramesh lose sight of this adage. If you thought defaults happened in the US only during the subprime crisis, think again. Though it’s difficult to quantify the cases of property repossession by banks and other lending institutions, such incidents are not unheard of in our country. At any rate, home loan borrowers are finding it increasingly difficult to pay back their loan on time, thanks to runaway inflation, rising interest rates, and high property prices.

“Cases of property repossession have definitely risen over the last year as high interest rates and high inflation have made loan repayment very difficult,” says Amit Shukla, Managing Consultant, AS & Associates Advocates and Legal Consultants, Lucknow.

Although repossession or foreclosure of a property has the same legal meaning in India, the process of repossession here is different from that prevalent in the US, maintain legal experts.

“In India, there is no fixed term after which the banks start issuing notices to a defaulter; it varies with the bank. Lenders usually give due notices to the defaulter after giving him sufficient time to settle his outstanding amount,” says Shukla.

Further, there is no one-size-fits-all norm or standard of property repossession in India, experts say. As Om Ahuja, CEO (Residential Services), Jones Lang LaSalle India, says, “There is no uniform and fixed norm for property repossession in India, as each bank has different standards of initiating process of repossession of property. While some banks have a high tolerance level and thus are more flexible in dealing with defaulters, others are not like so.”

Adhil Shetty, CEO, bankbazaar.com, adds, “Foreclosure norms in India are not crystal clear. Foreclosure of a property would happen when a person’s loan account with the bank becomes a non-performing asset which usually happens if the person defaults on paying six monthly installments. When this happens, the finance institution initiates summary proceedings against the borrower for recovery of their dues.”

Backed by Act

A lender has the right to repossess a property (whether movable or immovable) to recover its dues by auctioning it and this right is backed by two Acts of law called the Securitization & Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, and the Security Interest (Enforcement) Rules, 2002.

“The Sarfaesi Act empowers banks and financial institutions with the right to recover the mortgaged property in case of loan defaults without the intervention of the court. This means the lenders can take immediate action and bring into effect the takeover of the property in question quickly. Usually, a bank provides sufficient notice period to the borrower before this final action is implemented,” says Shetty.

The foreclosure process begins when a borrower defaults on loan payments (usually mortgage payments), and the lender files a public default notice, called a Notice of Default or Lis Pendens. After a specific period of time and with a court decree, the financial institution can attach the property for it to be auctioned off, he adds.

However, attaching a property is the last resort. As Navin Kumar Garg, FCA, Garg Navin & Company, Chartered Accountants, New Delhi, says, “Repossession is the last resort a bank or lending institution takes to. Banks and lending institutions try their best to cooperate with the defaulter. They remind him through notices and recovery teams. They warn him of the forfeiture of the property.”

This process of sending notices, reminders and recovery agents generally lasts for a year or two. During this period, if the customer accepts and proceeds ahead with repaying the loan, it’s good for him. However, if the borrower doesn’t respond to repeated notices by the bank and avoids negotiations with the bank for a year or two, then the bank is left with no option but eviction by invoking the Sarfaesi Act.

Life after foreclosure

Once the property is repossessed, the bank or the lending institution has to auction it publicly by inviting proper bids as it cannot sell it privately. After the sale, the bank retains whatever is owed to it and gives back the remainder of the amount to the borrower.

“Once the lender takes control of the property, an independent valuation is conducted with the help of an independent chartered surveyor who fixes two values for the property. One is the market value of what the property is actually worth and another is termed as the distress value, which is around 15 to 20 per cent lower than the market value. Due to the circumstances under which the auction is conducted, the property is almost always quoted with the distress value for the minimum bidding price at the auction. The property is then put up for auction, which is advertised in newspapers and also in certain websites,” says Shetty.

However, experts maintain that once the property is repossessed by the bank, this is not the end of the world, as a home owner can still remain hopeful of getting it back if it is not auctioned off. “If the borrower gives assurance to the court or the bank that he has managed funds to repay the loan, then he might be able to buy back his repossessed property before it is auctioned, but it depends on case to case,” says Garg.

Secondly, the home owner can also challenge the bank’s repossession attempt in a court of law. “If a home owner feels that the bank is wrong in initiating the repossession process, he can file a case against the bank in a Debt Recovery Tribunal (DRT) or a High Court but not in a district court. The DRT may pass stay order on the case or ask the appellant to enter into negotiation with the bank to resolve the issue. If the case is filed in the High Court, the court may direct the home owner to pay certain amounts of the outstanding later, extend the loan repayment term or decrease the EMIs,” says Shukla.

Once the case is in the DRT, it can pass order about the restoration of possession if it is proved that the bank is not right in proceeding under the provisions of the Sarfaesi Act, he adds.

Know your rights

Consumers must be aware of their legal rights in the event of an imminent foreclosure, says Shetty. First of all, all debtors and borrowers have rights under the Fair Debt Collection Practices Act (also known as the Consumer Credit Protection Act) to avoid or stop abusive, repetitive and unfair debt collection practices. Creditors can only call you at certain hours. Furthermore, you might also be entitled to a loan modification based on a change in financial situation. Loan modification is a change in the terms of a current loan, which could vary from interest rate reduction to principal amount reduction.

The borrower can also approach a debt counseling center to seek help in overcoming the debt situation by taking stock of their assets and also getting help in negotiating a loan modification deal with the bank to prevent losing the property.

Banking Ombudsman is another body which has been organized to provide assistance to borrowers if it is indeed proved that the bank in question did not give a fair chance to the borrower, he adds. Besides, as Garg of Garg Navin & Company says, banks and lending institutions have set up their own grievance redress cells to deal with distressed property cases which a customer can approach.

You can assert your rights, but the best way is to go the old-fashioned way: borrow as much as you can repay.