Legal Action Against Education Loan Defaulters In India

Many students opt for education loans to pay for their higher education as they generally cover all possible expenses related to education. They also have flexible repayment plans which allow students to pay off their loans comfortably in most cases. 

Generally, when it comes to an education loan, the interest rates are high because the repayment chances of an education are quite uncertain. Hence, private banks and NBFCs charge higher interest rates to mitigate the risk of defaulting as for most of the students they provide education loans without any collateral. 

In this article we are primarily going to understand how loan repayment works, methods of repayment, and Legal Action Against Loan Defaulters. What is education loan repayment? What happens when you fail to repay an education loan? 

Education loan repayment is an integral part of the education loan process. Repayment is basically the action of paying back a loan borrowed from a lender. The education loan repayment policies in India vary from lender to lender.

Students are offered a moratorium period by banks. The moratorium period refers to the time period offered to applicants in order to acquire a job after finishing their higher studies. It generally lasts from 6 months to 1 year. 

The students are not obliged to start paying back their loans before the moratorium period ends in the case of most banks. But a few banks ask for either partial or full simple interest during the moratorium period.  

So during a moratorium period, you either pay partial interest, full interest, or nothing at all. Once this period ends, that's when the lender based on how much amount you have disbursed from the sanctioned loan amount generates your EMIs and loan amortization schedule.

It is crucial to have a repayment plan in place when taking out an education loan, just as important as choosing the right lender according to the interest rates offered and your repaying capability.

Repayment tenure selection

The repayment tenure selection is a very important aspect if you want to avoid becoming a defaulter. Students generally select a very short repayment tenure as they are very optimistic about the chances of finding a job after finishing their master’s. 

But in cases where the student is unable to find a job or if they do find a job, but the pay isn’t as much as they expected, the short repayment tenure becomes a burden. 

students should take into consideration the worst-case scenarios as well, like what if you lose your job, if your package is less, or if it took you longer than expected to get a job. This is why we as WeMakeScholars tell our students to always opt for at least 10 years of loan repayment tenure.

Opting for a longer repayment period results in smaller EMIs during the initial years. While it is possible for students to make early payments to pre-close their education loan, extending the repayment tenure is a more complicated process.

Part pre-payment and pre-closure 

Pre-closure of the loan refers to the payment of the principal amount and the interest amount which has been incurred before the predetermined repayment tenure finishes. 

NBFCs and Private banks have something called a lock-in period. It means that you can only start repaying your education loan after 6 months of your first disbursement. They charge around 2k to 4k to pre-close an education loan. 

When you pay more than the required EMI for a particular month, the principal amount of the loan is reduced and consequently your EMIs are also reduced as your repayment schedule gets restructured according to the new principal amount.

• Impact on the credit score: After the repayment period begins for an education loan taken for studying abroad, the borrower is expected to pay EMIs by a specific due date. If the borrower misses the EMI payment by a period ranging from 1 day to 30 days, the lender reports it to the credit bureau, which reflects as DPD (Days Past Due) on the borrower's credit report. This reduces the borrower's CIBIL score and also decreases the likelihood of obtaining future loans.
• Frequent reminders from the lender: If you don’t repay the loan balance, you will receive a reminder and a notice from your lender. The lender will give you a gentle reminder within 90 days of not paying. After that, the lender will send you a notice if you continue to delay your EMIs. If you still haven’t paid your EMI, your lender may take further action such as declaring you a Non-Performing Asset or NPA, which means you won’t be able to get any other loan or credit.
• Penalties and Legal Action:  If you continue to default on your EMIs, lenders may fine you or take legal action against you. If you have provided collateral, lenders may use this as a means of recovering the loan by seizing it.That leads to a significant reduction in the credit score of the borrower. 

Note: If the EMI due date is missed by more than 30 days, the lender starts charging a penal interest, which is an additional penalty charged on top of the regular interest rate. Public banks usually charge around 2% per annum, whereas private banks and NBFCs charge approximately 3% to 4% per annum as penal interest.

Students have this false notion that if they miss their one EMI, then the bank will take away their pledged collateral security. But in reality, when you fail to repay an education loan, you get an ample amount of time and chances before the bank confiscates and auctions the collateral. However, when it becomes evident to the bank that the loan is unlikely to be repaid by the borrower, the bank makes the following decision as a last resort:

Education Loan Write Off

The borrower is not required to settle the remaining loan balance. They are relieved of the obligation to repay the outstanding loan amount, effectively resulting in the lender canceling the loan recovery process. In this scenario, the lender will write off the loan to ensure a clear balance sheet.

Section 138 of the NIL Act 1881 allows the lender to file a case against you. The time limit for filing the case is 180 days after non-repayment of the loan. According to the RBI mandate, there should be no violation of the rights of the borrower at any stage. Some of the fundamental rights should not be violated even if the borrower cannot repay the loan. 

• Right to Notice: The recovery notice should be served on the borrower within a reasonable period of time.
• Right to Fair Value: The borrower should receive a notice of fair value. The lender is responsible for informing the borrower about the selling price of the assets that have been foreclosed upon.
• Right to be Heard: The borrower must be heard and can raise objections to the notice of repossession sent by the lender.
• Right to Claim the Balance: If the amount of the remaining balance is less than the fair market value of the asset, the borrower can claim the remaining balance.
• Right to be Treated Politely: During the loan recovery process, the lender should treat the borrower with respect and dignity. The borrower should not be subjected to harassment, humiliation, abuse, or maltreatment throughout the entire process.

If your loan is in default, Foreign lenders like Prodigy Finance and MPower Finance terminate the loan agreement with you and begin legal proceedings to recover the outstanding balance. 

So how do the legal proceedings begin? 

• The case will be sent to arbitration in London, after which it will be sent to your local court to be enforced.
• The legal fees and interest will then be applied to your account from the date of the default. This will significantly increase the amount you owe on your loan.

Note: Arbitration is a dispute resolution technique used to resolve legal disputes between parties instead of going to court. 

The process of Arbitration:

• An independent third party, usually an experienced legal practitioner, is appointed to resolve the dispute
• Both parties provide their evidence to the third party, usually in the form of written submissions with attached documentation as proof
• The third party then makes a decision that is legally binding on both parties, which is the “Arbitration Award”

So Where does the arbitration process take place?

• The process can be conducted wherever you are in the world. An email will be used to communicate, and a video link will be used to attend hearings remotely.

Arbitration cost:

• Since a third party is appointed to resolve the dispute, this provides greater certainty of the costs associated with the process. 

Arbitration and your loan agreement:

• Depending on when your loan was signed, the dispute will either be referred to the Chartered Institute of Arbitrators ("CIArb") or the London Court of International Arbitration ("LCIA"). Your loan agreement, as amended, will confirm which arbitration forum applies to your loan. 
• If your loan agreement refers to the LCIA, you do have the option to refer the dispute to the CIArb, which is more cost-effective for both parties.
• For the matter to be referred to the CIArb, you can either: send an email to request the dispute be referred to the CIArb. This must be requested before we start any arbitration proceedings against you in the LCIA Or You will be contacted by the Lender before the arbitration proceedings begin with the LCIA for resolving your matter.
• If you don’t choose your dispute to be referred to the CIArb, then it must be resolved by the LCIA, which could be more costly for you. 

Note: The option to request a payment arrangement is no longer available once your loan has defaulted with foreign lenders.