If borrowers do not repay the loan on time, the banks record the account as a bad loan. They sell the loan account to asset reconstruction companies after receiving a specific amount from the banks. The employees of this company often contact the borrower on the phone and tell them that the specified amount should be paid into the account they specify. When the borrower goes to the bank and asks about this, they say that they have sold the loan and that they do not know anything more. In one such case, the Namakkal District Consumer Court has given a verdict on 07 January 2025.
Brief facts of the case
Arun Prasad (35), son of R. Manoharan, residing in Andipalayam near Tiruchengode in Namakkal district, had taken an education loan of Rs 2,57,000/- from the Indian Overseas Bank, Tiruchengode branch in November 2007. Arun Prasad’s father was the guarantor for this loan. Arun Prasad was working as a wage earner with his father as he could not get a job after completing his studies. The father and son did not pay the instalments of the education loan taken from the bank on time.
In March 2017, Indian Overseas Bank filed a case in the civil court to collect the loan from Manoharan and Arun Prasad. In April 2017, the father and son went to the bank and negotiated a plan to settle the loan in one instalment and paid the loan. The bank issued them a No Obligation Certificate (NOC) on the day of payment.
Even after this, the bank did not withdraw the case filed by the bank to collect the loan. As a result, in September 2019, the court ruled that Anu Prasad and Manoharan should pay Rs 5,16,885 to the bank. Meanwhile, Arun Prasad has got a job in a private company and is working. In this situation, it is said that since the beginning of 2024, representatives of Reliance Assets Reconstruction Company called Arun Prasad many times and asked to pay Rs 7 lakh for the loan taken from Indian Overseas Bank. Arun Prasad has received continuous text messages on his mobile asking him to pay the money. He met the concerned bank manager and informed that after the settlement some people are asking to pay again. He did not give a proper answer. “Arun Prasad has come to know that the bank has not withdrawn the case filed and that the loan agreement has been sold to Assets Reconstruction Company.
The father and son filed a complaint against the bank and Assets Reconstruction Company in the Namakkal District Consumer Court in August 2024. Neither the bank nor the Assets Reconstruction Company appeared before the Consumer Court. Based on the documents and evidence submitted by the complainants, the Namakkal District Consumer Court, headed by Judge Dr. V. Ramaraj, delivered the judgment on 7th January, 2025.
Order
The Order of the Consumer Court as follows: “The bank should pay Rs. 5 lakhs as compensation to the complainants for the mental agony and pain caused by the bank’s deficiency in the service. The bank should issue a letter to the complainants that it was wrong, which authorized the reconstruction company to collect the debt. In case of comply the order, the bank should pay Rs. 5,000/- as additional compensation to the complainants for each day. The reconstruction company should not take any collection action related to this education loan account against the complainants”.
Background
It is a common practice to borrow money by executing a promissory note or mortgage deed. Sometimes, the lender receives money from other persons by way of transferring (made over) the promissory note or mortgage deed and gives the right to collect the loan to other persons. It is also a common practice for the lender or the transferee of the loan account to file a case in court against the borrower and his assets to take action. It was a common practice until the last 10 years to take action against the borrower and his assets through the court if the borrowers of banks failed to repay the loan within the due period as per the loan agreement. Various changes have now taken place in this regard.
The SARFAESI Act (The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) was enacted in Parliament in 2002 to help banks recover defaulted loans. This Act paved the way for banks to possess and sell the mortgaged assets directly without going to court if borrowers who take loans against property fail to repay the money to the bank. Action cannot be taken under this Act against loans on agricultural land of less than one lakh rupees and loan accounts where 80 percent of the loan amount has been repaid.
Under this Act, a way was paved for the registration and functioning of Asset Reconstruction Companies. These companies are regulated by the Reserve Bank of India. The job of Asset Reconstruction Companies is to buy loan accounts that are in default from banks by paying a certain amount to the banks. Then they contact the borrowers and collect the money legally. In other words, the banks sell the unpaid loan accounts to these companies. These companies contact the default borrowers directly by phone or email and they carry out collection activities in their own style. The bank does not even inform the customers that their account has been sold to this company. When the collection companies contact the customers and go to the banks, even if they ask, the bank says that they do not know.
The Consumer Park Opinion: At least the banks should inform to the default borrower about the sales of his loan account to the asset reconstruction company and these companies also should inform to the borrower about the purchase details.
