Treat notice from loan recovery firms seriously

An entirely new agreement will be drawn up with the asset reconstruction company if the loan is being restructured

If you have defaulted on your home/car/personal loan, don't be surprised if you get a letter from an asset reconstruction company (ARC), asking you to settle. Faced with rising non-performing assets (NPAs), banks have started selling retail loans to ARCs. This helps banks clear bad loans from their books and set free capital for further lending. For ARCs, it is more business, since their main role is recovering money from bad loans.

At the time of sale of loan, the selling bank has to inform the customer. If not, borrowers need not respond to the notice until they receive an intimation from the bank, says V N Kulkarni, chief counsellor with Abhay Credit Counselling. “As far as the borrower is concerned, his agreement is with the bank. Even if it may be written in the loan agreement that the bank has the right to sell the loan if it turns non-performing asset (NPA), the customer must be informed before doing so,”' Kulkarni adds.

Before making the payment, ask for the statement of account or a copy of property documents, as proof of the loan being sold to the ARC.

And, since the bank will sell the loan only after it becomes an NPA, it is possible you will have to pay a penalty along with pending interest dues.

The ARC would normally follow the original contract signed between the bank and the customer with regard to the rate of interest and penal interest. “Normally, we go by the contract signed between the selling bank and the customer with regard to the rate of interest and penal interest. We consider the rate of interest charged by the bank as on the date of our acquisition,” says Sanjay Agarwal, executive vice-president (head-SME and retail business) at Asset Reconstruction Company (India).

The ARC will also work with customers to settle the loan like banks. But in case of retail loans, the ARC is not likely to offer an extended period for repayment or restructuring the loan, unlike your bank. Even interest rates will be different from what your bank charges, as an entirely new agreement would be drawn up with the ARC if the loan repayment is restructured. “Interest rates could be lower or higher than what the bank had contracted at the time of extending the loan. We have bought loans that were contracted at rates as high as 15 -18 per cent. But the rates we offer for restructuring will be closer to the current market rates,” says Agarwal.

When it comes to settlement, if the case is genuine, then the ARC might allow some additional time for repayment or settlement. “In cases where the borrower has some genuine reason for not paying, we may allow some discount on compassionate grounds,” Agarwal adds.

Since ARCs, too, share data with credit bureaus, the repayment track record after the bank sells the loan also gets captured in customers' credit records.

“Customers should treat a notice from an ARC as seriously as a notice from their bank,” says Mohan Jayaraman, managing director, Experian Credit Information Company of India.

It is better for customers to settle the loan without a haircut or a discount. This will show in the customer's credit records as “settlement without right offs”. If a discount is offered, then the loan will show in the credit record as ”settlement with right offs”.

“The first negative impact on customer’s credit history is the fact that the loan has become an NPA. But if it is settled without right offs, it will indicate that the bank or ARC was able to recover the entire money. This will improve the customer’s credit history,” says Jayaraman.

Like banks, ARCs, too, can take recourse to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act ) and try to recover the money by selling the property, if it is a home loan. But most would prefer to settle a loan instead of going in for litigation, which is why it is in the customer's interests to work with the ARC to settle the loan.

The ARC will work with customers to settle the loan and as they are focused on recovery they will be able to offer a pragmatic solution to customers.

In case the ARC gives more time to repay, interest rates it charges could be different from the original contract signed with the bank. "The rates we offer will be closer to the current market rates,'' the ARC official says.