A loan default is the failure to pay an instalment of a loan on the date it falls due. In India the consequences follow a known sequence – reminders, a legal notice, recall of the loan, and then one of a small number of legal routes that depend on whether the loan is secured and how large it is – and at every stage the borrower has rights that lenders and their recovery agents must respect. This guide explains what a bank or NBFC can lawfully do after a personal, car, home or business loan default, what it cannot do, how a settlement is negotiated and what it does to your credit record, when the “wilful defaulter” label applies, and what a loan settlement lawyer actually does for a borrower in Delhi.
Loan default at a glance
- Secured loans (home, car, loan against property): the lender can enforce the security without going to court under the SARFAESI Act, 2002 – a 60-day notice under Section 13(2), then possession and sale under Section 13(4) – and the borrower can challenge the action before the Debts Recovery Tribunal within 45 days (Section 17).
- Unsecured loans (personal loans, credit cards): the lender’s remedy is a suit – in the Debts Recovery Tribunal if the debt is Rs 20 lakh or more, otherwise in the civil court – or a cheque-bounce complaint if a security cheque or EMI cheque has bounced.
- Recovery agents: RBI’s circular of 12 August 2022 bars intimidation or harassment of any kind, calls before 8 a.m. or after 7 p.m., persistent calls, threats, public humiliation, contacting family or friends, and false or misleading representations; the lender is responsible for its agents.
- Settlement: a one-time settlement, restructuring or a Lok Adalat compromise are all possible; a Lok Adalat award is a decree of a civil court with no appeal.
- Time limit: a suit for money lent must be filed within three years (Limitation Act, Articles 19 and 37).
- “Wilful defaulter”: a label with serious consequences, applied only after a show-cause process, where the default is deliberate and the outstanding is Rs 25 lakh or more (RBI Master Direction of 30 July 2024).
Reviewed and updated by Century Law Firm, Delhi – October 2026. Statutory references are to the Acts as in force on that date.
What counts as default, and what happens first
Every loan agreement defines default; a missed EMI is the usual trigger, and most agreements also treat a bounced cheque, a false statement in the application or the sale of the secured asset as default. The first consequences are contractual: penal charges under the agreement, telephone and written reminders, and reporting of the overdue status to the credit information companies to which every lender reports its borrowers’ repayment history. Once instalments remain unpaid beyond the period fixed by the Reserve Bank’s asset-classification norms, the lender classifies the account as a non-performing asset, after which recovery moves from the branch to the lender’s legal and recovery departments. A legal notice from the lender’s advocate demanding payment of the overdue amount within a stated time, and then a loan recall notice calling up the entire outstanding balance, usually follow. Neither notice is a court order, but both are the lender’s record that it gave the borrower an opportunity to pay, and both should be answered in writing, because the reply is the borrower’s first chance to put his own position – a dispute about the amount, a request for time, an offer to settle – on record.
What the lender can do: the legal routes in order
For a secured loan the main route is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), which lets a bank or a notified financial institution enforce its security without a court at the first stage. Section 13(2) provides that where a borrower under a liability to a secured creditor makes any default in repayment of the secured debt or any instalment, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities within sixty days from the date of the notice. If the borrower makes a representation or raises an objection to the notice, Section 13(3A) requires the secured creditor to consider it and, if it does not accept the objection, to communicate its reasons to the borrower. If the dues are not paid within the sixty days, Section 13(4) allows the creditor to take possession of the secured asset, including the right to sell or lease it, to take over the management of the borrower’s business, to appoint a manager for the assets taken over, and to require anyone who owes money to the borrower in respect of the secured asset to pay the creditor instead. The Department of Financial Services’ DRT portal states that the Act applies where the security interest secures more than Rs 1 lakh and the amount due is 20 per cent or more of the principal and interest, and that it does not apply to security created on agricultural land. Any person aggrieved by a measure under Section 13(4), including the borrower, may apply to the Debts Recovery Tribunal under Section 17(1) within forty-five days of the measure; that application, called a securitisation application, is where a wrongful possession notice, an inflated demand or a sale at an undervalue is challenged. Our post on the Debts Recovery Tribunal explains the tribunal’s procedure, and our DRT tools calculate the tribunal’s fee.
For recovery of the debt itself, as opposed to enforcement of a security, a bank or financial institution files an original application under the Recovery of Debts and Bankruptcy Act, 1993 before the Debts Recovery Tribunal where, as the DRT portal states, the amount of debt due is Rs 20 lakh or more; smaller claims, and claims by lenders not covered by that Act, go to the civil court as a suit for recovery of money. A suit on a loan is subject to the Limitation Act, 1963: Article 19 gives three years for money payable for money lent, running from when the loan is made, and Article 37 gives three years on a promissory note or bond payable by instalments with a clause making the whole sum due on default, running from when the default is made (or, if the lender waives the default, from a fresh default). Under Sections 18 and 19 of the Limitation Act a written acknowledgment of liability signed by the borrower, or a payment on account of the debt acknowledged in writing, starts a fresh period from that date, which is one reason lenders ask defaulting borrowers to sign balance confirmations; our limitation calculator works out the dates.
A third route is criminal in form. Where an EMI cheque or a security cheque given to the lender has been dishonoured, the lender can file a complaint under Section 138 of the Negotiable Instruments Act, 1881 after the statutory notice, and the borrower faces a criminal trial in addition to the civil claim. Our posts on cheque bounce cases and the cheque bounce FAQ explain the notice, the time limits and the defences. Where a loan was obtained on forged documents or the asset was sold off, lenders also lodge FIRs for cheating or criminal breach of trust (now Sections 318 and 316 of the Bharatiya Nyaya Sanhita, 2023, formerly Sections 420 and 406 IPC), but an ordinary inability to pay is a civil matter and not an offence.
Your rights when recovery agents call
The Reserve Bank’s circular of 12 August 2022, “Outsourcing of Financial Services – Responsibilities of regulated entities employing Recovery Agents” (RBI/2022-23/108), applies to commercial banks (including small finance banks and regional rural banks), all-India financial institutions, NBFCs including housing finance companies, co-operative banks and asset reconstruction companies. It directs that regulated entities shall strictly ensure that they or their agents do not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, and it spells out what that includes: acts intended to humiliate publicly or intrude on the privacy of the debtor’s family members, referees and friends; sending inappropriate messages on mobile or social media; making threatening or anonymous calls; persistently calling the borrower, or calling the borrower before 8:00 a.m. and after 7:00 p.m. for recovery of overdue loans; and making false and misleading representations. The circular states that the ultimate responsibility for outsourced activities rests with the regulated entity, which is responsible for the actions of its recovery agents, and that any violation will be viewed seriously.
A borrower who is harassed should record the calls and messages, note the agent’s name and the agency, and complain in writing to the lender’s grievance redressal officer, citing the circular. If the lender does not reply within 30 days or the reply is unsatisfactory, the complaint can be taken to the RBI Ombudsman under the Reserve Bank – Integrated Ombudsman Scheme, 2026, through the RBI’s Complaint Management System (cms.rbi.org.in) or its contact centre on 14448; the Scheme requires that the complaint to the Ombudsman be made within 90 days of the expiry of that 30-day period or of the lender’s last communication, whichever is later, and that the grievance is not already pending before a court. Where an agent threatens violence, enters the home or seizes property by force, the matter is also a criminal one and a complaint can be made to the police; our guide to making a police complaint explains how. Harassment does not cancel the debt, but it gives the borrower leverage in settlement and, where a SARFAESI measure has been taken, is a ground that the Debts Recovery Tribunal will take into account.
Settlement options: restructuring, one-time settlement and Lok Adalat
Most defaults end in a settlement rather than a judgment, because a lender would rather recover part of the money now than all of it after years of litigation. The options are of three kinds. Restructuring keeps the loan alive on new terms – a longer tenure, a lower EMI, a moratorium on principal for some months – and is the right answer for a borrower whose difficulty is temporary; it is a matter for the lender’s policy. A one-time settlement (OTS) closes the loan on payment of a reduced lump sum; the lender writes off the balance and issues a no-dues certificate, and reports the account to the credit information companies as settled, which lenders read differently from an account closed on full payment and which affects future borrowing until the record ages. An OTS should always be in writing, should state that the payment is in full and final settlement of all claims under the loan, and should be paid within the time the letter allows, because a settlement that is not fully paid is treated as having failed.
The third option is a Lok Adalat. Lok Adalats have statutory status under the Legal Services Authorities Act, 1987; any case pending before a court, and any dispute which has not yet reached a court, can be referred to one, and a lender’s recovery claim, whether pending in court or not yet filed, can be placed before one, including the National Lok Adalats that are held across the country on a single day at regular intervals. The National Legal Services Authority explains that the award of a Lok Adalat is deemed to be a decree of a civil court, is final and binding on all parties with no appeal to any court, that no court fee is payable when a matter is filed in a Lok Adalat, and that where a pending matter is settled the court fee originally paid is refunded. For a borrower a Lok Adalat settlement has the advantage that the compromise becomes an enforceable decree in a single sitting, which closes the lender’s suit and the recovery proceedings on terms recorded by the court.
The “wilful defaulter” label
Not every defaulter is a wilful defaulter. Under the Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024, issued on 30 July 2024, “wilful default” means a default where the borrower had the capacity to pay and did not, or diverted or siphoned off the funds, or disposed of the secured assets without the lender’s knowledge, or failed to bring in promised equity despite being able to; and a “wilful defaulter” is a borrower or guarantor who has committed wilful default and whose outstanding amount is Rs 25 lakh and above. A separate category of “large defaulter” covers a defaulter with an outstanding of Rs 1 crore and above whose account has been classified as doubtful or loss or against whom a suit has been filed. The Directions prescribe a procedure before the label is applied: an identification committee examines the evidence and issues a show-cause notice, the borrower has 21 days to respond, a proposal to classify is followed by a further 15 days for a written representation, and a review committee gives a personal hearing and passes a reasoned order. The consequences are that no lender may grant additional credit facilities to a wilful defaulter or an entity associated with him, for one year after the name is removed from the list of wilful defaulters, and no credit for floating new ventures for five years after removal; wilful defaulters are not eligible for restructuring; the list is reported to the credit information companies every month; and lenders may examine whether criminal proceedings are warranted. The name is removed from the list within 30 days of the outstanding falling below Rs 25 lakh, and in a compromise settlement only when the borrower has fully paid the compromise amount.
What a loan settlement lawyer does for a borrower
A lawyer’s work in a default case begins with the papers: the loan agreement, the statement of account and the notices, to check whether the amount demanded is correct, whether the penal interest and charges are those the agreement allows, whether the notice under Section 13(2) is in order, and whether the lender’s claim is within limitation. The second task is correspondence – replying to the legal notice and the Section 13(2) notice so that the borrower’s objections are on record under Section 13(3A), and making a reasoned settlement proposal supported by the borrower’s financial position. The third is negotiation with the lender’s recovery or legal department for restructuring or a one-time settlement, and recording the agreed terms so that they bind the lender. Where the lender has already moved, the lawyer represents the borrower before the Debts Recovery Tribunal in a securitisation application or in defence of the original application, in the civil suit, in the cheque-bounce complaint, or in the Lok Adalat, and, where the lender’s conduct crosses the line, before the RBI Ombudsman or the police. For a lender, the same lawyer’s work runs in reverse: drafting notices that will withstand challenge, filing the application or suit in the right forum and in time, and executing the decree.
Century Law Firm’s banking and recovery team advises borrowers and lenders in loan default, loan settlement and debt recovery matters in Delhi – before the Debts Recovery Tribunals and the Debts Recovery Appellate Tribunal at Delhi, the district courts and the High Court – including personal loan, credit card, car loan, home loan and business loan defaults, SARFAESI possession notices, cheque-bounce complaints and Lok Adalat settlements. See our banking law practice page or contact us for a consultation.
What to do if you cannot pay an EMI
Tell the lender before the due date rather than after it, in writing, and ask for the options its policy allows; a request made before the account slips into default is treated differently from one made after a notice. Keep paying what you can, because part-payments show good faith and are reflected in the account. Do not hand over signed blank cheques or additional post-dated cheques to a recovery agent, and do not sign a balance confirmation or a fresh agreement without reading it, since each of these can extend limitation or add to the debt. Be straightforward with the lender about your finances – a borrower who explains a job loss or a medical expense and proposes what he can pay is treated as someone who intends to repay, which is the basis of every restructuring and settlement. Look at other ways of clearing the arrears before the account is classified, such as help from family, sale of an asset or extra income, because the cost of a default grows at every stage. Reply to every notice, keep copies, and keep a record of every call. If a settlement is offered, get it in writing with the words “full and final” and pay within the time given. And if the asset is a home or a vehicle under a SARFAESI notice, take advice within the sixty days, because the objection under Section 13(3A) and the application under Section 17 both have time limits that cannot be extended by the lender’s silence.
लोन डिफ़ॉल्ट और लोन सेटलमेंट – हिंदी में (Loan default in Hindi)
लोन डिफ़ॉल्ट का मतलब है लोन की किस्त (EMI) नियत तारीख पर न चुकाना। इसके बाद बैंक या NBFC पहले रिमाइंडर भेजता है, फिर वकील के ज़रिये कानूनी नोटिस और लोन रिकॉल नोटिस, और उसके बाद कानूनी कार्रवाई करता है। घर, गाड़ी या संपत्ति के बदले लिए गए सुरक्षित लोन में बैंक SARFAESI अधिनियम, 2002 की धारा 13(2) के तहत 60 दिन का नोटिस देकर, बिना अदालत गए, धारा 13(4) के तहत गिरवी संपत्ति पर कब्जा लेकर उसे बेच सकता है; कर्ज़दार धारा 13(3A) के तहत नोटिस पर आपत्ति दे सकता है और धारा 17 के तहत 45 दिन के भीतर ऋण वसूली अधिकरण (DRT) में अर्ज़ी दे सकता है। पर्सनल लोन और क्रेडिट कार्ड जैसे असुरक्षित लोन में बैंक को मुकदमा करना पड़ता है – 20 लाख रुपये या उससे अधिक के कर्ज़ के लिए DRT में, उससे कम के लिए सिविल अदालत में – और परिसीमा अधिनियम के अनुसार यह मुकदमा तीन साल के भीतर दायर करना होता है। चेक बाउंस होने पर परक्राम्य लिखत अधिनियम की धारा 138 के तहत आपराधिक शिकायत भी हो सकती है, लेकिन केवल भुगतान न कर पाना अपने आप में अपराध नहीं है।
रिकवरी एजेंटों के लिए भारतीय रिज़र्व बैंक का 12 अगस्त 2022 का परिपत्र साफ़ है: किसी भी तरह की धमकी या उत्पीड़न, सुबह 8 बजे से पहले या शाम 7 बजे के बाद फोन, बार-बार फोन, परिवार या दोस्तों को परेशान करना, सार्वजनिक रूप से अपमानित करना और झूठी बातें कहना मना है, और एजेंट के व्यवहार की ज़िम्मेदारी बैंक की है। उत्पीड़न होने पर पहले बैंक के शिकायत अधिकारी को लिखित शिकायत करें; 30 दिन में जवाब न मिले या जवाब संतोषजनक न हो तो 90 दिन के भीतर RBI लोकपाल (cms.rbi.org.in, फोन 14448) के पास शिकायत की जा सकती है। समझौते के तीन रास्ते हैं – लोन का पुनर्गठन, एकमुश्त समझौता (OTS, जिसके बाद क्रेडिट रिपोर्ट में खाता “settled” दिखता है) और लोक अदालत, जिसका फैसला सिविल अदालत की डिक्री के बराबर होता है और जिसके खिलाफ अपील नहीं होती। “विलफुल डिफ़ॉल्टर” का ठप्पा केवल उस कर्ज़दार पर लगता है जो चुकाने की क्षमता होते हुए न चुकाए, पैसा कहीं और लगा दे या गिरवी संपत्ति बेच दे, और जिसका बकाया 25 लाख रुपये या अधिक हो; इसके लिए कारण बताओ नोटिस, 21 दिन का जवाब और सुनवाई ज़रूरी है (RBI मास्टर डायरेक्शन, 30 जुलाई 2024)।
Frequently asked questions
A personal loan is unsecured, so the bank’s remedies are a suit for recovery – before the Debts Recovery Tribunal if the debt is Rs 20 lakh or more, otherwise in the civil court – within three years under the Limitation Act, and a complaint under Section 138 of the Negotiable Instruments Act if an EMI or security cheque has bounced. Inability to pay is not by itself a criminal offence, and the bank cannot seize your property without a court or tribunal order.
For a secured loan, yes, under the SARFAESI Act: after a 60-day notice under Section 13(2), and after considering any objection you raise under Section 13(3A), the bank can take possession of and sell the secured asset under Section 13(4). You can challenge the measure before the Debts Recovery Tribunal within 45 days under Section 17. The Act does not apply to security created on agricultural land.
RBI’s circular of 12 August 2022 bars intimidation or harassment of any kind, verbal or physical, public humiliation, intruding on the privacy of family, referees and friends, inappropriate messages, threatening or anonymous calls, persistent calls, calls before 8 a.m. or after 7 p.m., and false or misleading representations. The lender is responsible for its agents’ conduct and violations are viewed seriously.
Record the calls, complain in writing to the lender’s grievance redressal officer citing the RBI circular, and if there is no reply within 30 days or the reply is unsatisfactory, complain to the RBI Ombudsman within 90 days through cms.rbi.org.in or the contact centre on 14448. Threats of violence, forced entry or forcible seizure can also be reported to the police.
A notice by which the lender calls up the entire outstanding balance of the loan at once, instead of the instalments, because of a default under the agreement. It is a contractual step that usually precedes a SARFAESI notice, a suit or a tribunal application, and it should be answered in writing.
A one-time settlement closes the loan on payment of a reduced lump sum agreed with the lender, which writes off the balance and issues a no-dues certificate. The lender then reports the account to the credit information companies as settled rather than closed on full payment, which affects future borrowing until the record ages. Get the terms in writing with the words “full and final” and pay within the time allowed.
Yes. Both pending recovery cases and disputes not yet in court can be placed before a Lok Adalat, and banks bring large numbers of loan cases to the National Lok Adalats. The award is deemed a decree of a civil court, is final and binding with no appeal, no court fee is payable, and court fee already paid in a pending case is refunded.
Under the RBI’s Directions of 30 July 2024, a borrower or guarantor who had the capacity to pay but did not, or diverted or siphoned the funds, or disposed of the secured assets without the lender’s knowledge, or failed to infuse promised equity, with an outstanding of Rs 25 lakh or more – and only after a show-cause notice, 21 days to respond, a review committee and a personal hearing. A wilful defaulter gets no fresh credit for a year after removal from the list and no finance for new ventures for five years.
Three years. Article 19 of the Limitation Act gives three years from when the loan was made for money lent, and Article 37 gives three years from the default for a promissory note or bond payable by instalments with a whole-sum-due clause. A written acknowledgment of liability signed by you, or a payment acknowledged in writing, starts the period again (Sections 18 and 19), so be careful what you sign.
Not legally, but a lawyer checks whether the amount demanded and the charges are correct, replies to the notices so that your objections are on record, negotiates and records the settlement so that it binds the lender, and represents you before the Debts Recovery Tribunal, the court, the Lok Adalat or the RBI Ombudsman if the matter goes further.
Not for non-payment alone; inability to pay is a civil matter. A criminal case arises only where a cheque given to the lender has bounced (Section 138 of the Negotiable Instruments Act) or where the loan was obtained by fraud or the secured asset was sold off, which lenders report as cheating or criminal breach of trust (now Sections 318 and 316 BNS, formerly 420 and 406 IPC). A threat by a recovery agent to “send the police” for an ordinary default is itself a breach of the RBI circular.
Yes. A guarantor is liable under the guarantee he signed, the lender can proceed against him for the debt, and the RBI’s 2024 Directions define a wilful defaulter to include a guarantor who has committed wilful default with an outstanding of Rs 25 lakh or more. A settlement should therefore release the guarantor expressly.
Reply in writing within the time given, through a lawyer if possible. State any dispute about the amount or the charges, give the reason for the default, and make a concrete proposal – a repayment schedule, a request for restructuring or an offer of settlement. The reply goes on record, is seen by the tribunal or court if the matter goes further, and is usually the start of the negotiation.
Conclusion
A loan default is a civil problem with a legal structure around it. The lender’s options are fixed by the kind of loan and its size – SARFAESI for secured loans, the Debts Recovery Tribunal above Rs 20 lakh, the civil court below it, and the cheque-bounce complaint where a cheque has bounced – and each of them has notices, time limits and a forum in which the borrower can be heard. The borrower’s protections are equally fixed: the RBI’s limits on recovery agents, the Ombudsman, the three-year limitation, the objection and the tribunal application under SARFAESI, and the settlement routes, of which the Lok Adalat gives the most certain result. The borrower who answers every notice in writing, keeps records and takes advice within the sixty days of a SARFAESI notice is in a far stronger position to settle than the one who waits for the agents to stop calling.
Sources used for this post: the SARFAESI Act, 2002, Sections 13(2), 13(3A), 13(4) and 17(1) as reproduced by the Supreme Court in Axis Bank v. SBS Organics Pvt. Ltd. (Civil Appeal No. 4379 of 2016, 22 April 2016); the Department of Financial Services’ DRT/DRAT portal (applicability of the RDB Act and the SARFAESI Act); the Limitation Act, 1963 (Sections 18 and 19 and Articles 19 and 37); the Reserve Bank of India’s circular RBI/2022-23/108 of 12 August 2022 on recovery agents; the Reserve Bank – Integrated Ombudsman Scheme, 2026; the Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024 (30 July 2024); and the National Legal Services Authority’s page on Lok Adalats.
