At present when the financial sector and share market are going through a lot of turmoil, there have been lots of reports regarding NPAs (Non-Performing Assets) and their write-offs. Similarly, you must have also read about loan waiver extended by the government to particular sections of the society.
It is very easy to confuse these terms and sometimes also use them interchangeably,but in reality, both these terms have entirely different implications and consequences. If you are also confused about both these terms and their usage, then read further to get a clear picture.
What do you mean by default on loan repayment?
With the rapid progress of the financing industry, the competition has increased significantly amongst the lenders to grab the attention of the customer. This has led to significant decrease in the interest rates charged. Earlier there were only a selected few banks and NBFCs (Non-Banking Financial Companies) that used to offer the facility of loans to customers. But with the liberalisation of the financing sector, customers have access to Low-Interest Personal Loans, Home Loans, machinery loans,and so on.
When you apply for any type of the loan, you sign an agreement with the bank, called the Loan Agreement, wherein you accept the terms and conditions mentioned in the agreement. By signing the agreement, you agree to pay the loan back through EMIs (Equated Monthly Instalments) which include both the interest and principal component, payable over the tenure of the loan.
Sometimes, you are unable to pay the EMI for your Personal Loanor another type of loan on time due to financial crunch. You then receive a notice from the lender to repay the EMI along with penal interest and other charges. If you pay the EMI along with the additional charges, then the loan account continues to run as usual. But if your financial situation worsens further and you are unable to pay three consecutive EMIs, you will receive a notice from the lender that you have defaulted on a loan payment and as such your account has been categorised as an NPA and they will be taking legal action against you to recover the dues.
What legal actionscan be taken in case of loan default?
The legal action that can be taken in case of a loan default depends on the category of the loan:
- If the loan is a secured loan,i.e., you had hypothecated security at the time of availing the loan, then the lender can take possession of the security and go forward with auctioning it to recover the dues. If the amount realised from the auction is less than the total dues, then the lender can pursue the matter in court to recover the remaining amount.
- If the loan is an unsecured loan,i.e., you did not hypothecate any security at the time of availing the loan, then the lender can only pursue the matter in court and initiate criminal proceedings against you. The lender will also offer you to settle the account by paying approx. 40% of the entire dues. It is up to your discretion as to what course you want to take.
Loan Waiver vs. Loan Write Off
Now, if the lender is unable to recover the dues using the legal course, they have two options, either to write off the loan or to waive off the loan. Although the two terms sound similar, there is a lot of difference between them.
Loan Write off: Loan write off essentially means that the bank has acknowledged that the said loan has become bad and the payment would not be received regularly. This leads to a decline in the total assets of the lenders and impacts their balance sheet adversely. It does not mean that the borrower is absolved of the liability. The lender would still make all the efforts to recover the dues using legal as well as administrative methods.
Loan Waiver: Loan waiver means that the lender has foregone the loan amount and would not be pursuing the borrower for the recovery of the amount. Usually, loan waiver is offered by the Government, central or state, due to exceptional circumstances. It is done in cases when the borrowers belong to a particular group and are unable to repay the loan due to uncontrollable circumstances.The government later compensates the lenders for the losses suffered due to loan waiver. For e.g.,farm loan waiver.
The fact of the matter is that write-offs are essential for the lenders as they help in presenting the true pictures in front of all the stakeholders and does not give any false assurances to them. This ensures smooth and transparent operations and also ensures that appropriate actions could be taken in case the situation goes out of hand. The lender does not forego the loan amount and takes every possible measure to ensure the recovery of dues.
Whereas, in case of loan waiver, the lenders are not impacted significantly as they are compensated by the Government for the losses incurred. It is necessarily a policy decision of the government and has nothing to do with the lender.
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