How to get loan settlement done through Banking Ombudsman?

Summary

Occasionally, the borrowers also go through financial crises and cannot return their loans in terms of time. In this scenario, they can ask for a settlement of the loan from the bank, which is a compromise agreement where the borrower pays a lesser amount than the actual amount to settle the loan. But banks don’t always agree. If the bank fails to respond or offers an unjustified settlement, you can turn to the Banking Ombudsman, which is a redressal agency operated by the Reserve Bank of India (RBI).

Before you approach the Ombudsman, you must attempt to settle the matter directly with your bank. Submit an application explaining your position and request for settlement. In case the bank fails to reply within 30 days or refuses to assist you, then you can approach the Ombudsman.

You can file your complaint in three ways – online through the RBI’s CMS portal, by email, or by post. Make sure that all documents that are pertinent to the complaint, such as the loan agreement, bank correspondence, and any proof of financial difficulty, are appended. Once the complaint is received, the Ombudsman will consider it, discuss the matter with the bank, and even arrange a meeting between the two.

Introduction

In certain instances, people take a loan from banks to buy a house, a car, or for going to other personal needs. But due to unemployment, sickness, or some other financial downturn, they are unable to repay the loan on time. At this point, the loan becomes a burden, and banks resort to telephonic calls or send recovery staff to raise funds. Most individuals try to negotiate the loan with the bank, but sometimes the bank refuses to or imposes unreasonable demands. In those cases, a direct and lawful means of requesting help – complaining to the Banking Ombudsman – exists.

The Banking Ombudsman is the official empowered by the Reserve Bank of India (RBI) to help customers who have disputes with banks. This mechanism was created to ensure that customers are treated fairly by the banks. Loan settlement is one of the major issues people complain about.

Settlement of a loan is a process where the borrower and the bank agree to a mutual settlement of the loan account in terms of paying a part of the total outstanding amount. For example, if somebody has ₹5 lakh to pay back to the bank but is unable to do so, he can go to the bank and propose accepting ₹3 lakh as full and final settlement. Banks sometimes comply, and sometimes they deny or delay the process. That is where the Banking Ombudsman can help you.

In this piece, we are going to dissect it step by step on how to organize a settlement for a loan through the Banking Ombudsman, the papers required, the conditions that must be met, and how long it takes. It can be such a relief to the people who are struggling with loan stress without knowing where they are supposed to go.

What is a Loan Settlement?

Loan Settlement is a process in which you negotiate with your creditor to forgive a part of the outstanding amount on your Loan by making a lump sum payment. It is an agreement that you make with your card issuer as a last resort when you see that your Loan debt is increasing.

This can happen due to many reasons, ranging from unnecessary spending to careless spending habits. When your debt increases, the interest on it also increases, which can make it difficult for you to repay the outstanding amount. If you do not see any way out of this, then you can recommend a Loan Settlement.

What are the reasons for doing a Loan Settlement?

Below are some common reasons:

• If a person loses his job, stops a source of income, or suffers huge losses in business, then it may be difficult to repay the loan on time.

• There may be a shortage of money to repay the loan if the expenses suddenly increase due to a major illness or medical emergency.

• Many times, a person has the burden of more than one loan, which becomes difficult to repay on time.

• There may be problems in repaying the loan due to any natural disaster, accident, or any major crisis in the family.

• If the interest rate of the loan is very high and there is a problem in repaying the installment, then a Loan Settlement is resorted to.

• Many times, a person is not able to manage his expenses and income properly after taking a loan, which causes problems in repaying.

What to do before doing a Loan Settlement?

Below are some steps that should be followed before a Loan Settlement:

• First of all, check your income, expenses, and all other debts properly. Know how much you can repay.

• Before a Loan Settlement, share your problem with the bank or lender. 

• Sometimes, they can offer you a better solution, such as reducing the EMI or increasing the loan term.

• Contact a financial advisor or expert. They can help you make the right decision and explain how a Loan Settlement will affect your credit score.

• If you decide to do a Loan Settlement, read the terms and conditions given by the bank carefully. Make sure that you are not being charged any hidden fees.

• Doing a Loan Settlement can reduce your credit score. This can make it difficult to get a loan in the future. Make a decision keeping this in mind.

• Loan Settlement should be the last option. Before that, consider other options like refinancing, reducing EMIs, or asking family and friends for help.

What documents are required to do a Loan Settlement?

Let us know what documents are required for a Loan Settlement.

1. ID Proof

• Aadhar Card
• PAN Card
• Passport
• Driving License
• Voter ID

2. Address Proof

• Aadhar Card (if it has the correct address)
• Electricity or Water Bill
• Copy of Bank Passbook or Bank Statement
• Rent Agreement (if you live on rent)

3. Income Proof (if required)

• Salary Slip (if you are employed)
• Bank Statement (last 6 months)
• Copy of Income Tax Return (ITR)
• Business Documents (if you are a businessman)

4. Loan Statement

You will have to provide the Loan statement to give the correct information about your outstanding balance. The bank can also generate this statement itself, but sometimes they ask you for a copy of it.

5. Settlement Request Letter

If you are approaching the bank for settlement on your own, you will have to give a written Settlement Request Letter in which you can explain:

• Why do you want a settlement?
• What is your financial situation?
• How much can you pay as a one-time payment?

6. Settlement Offer Letter given by the bank

When the bank agrees to the settlement, it gives you a Settlement Offer Letter. Read it carefully and confirm the amount and terms mentioned in it.

How to apply for a Loan Settlement?

Step-by-step process to apply for Loan Settlement

• First of all, decide that you are not in a position to pay the entire Loan dues.

• Check your income and expenses and decide how much you can pay at most.

• Talk to the customer care of your bank or Loan company and tell them about your current financial situation.

• Ask for a settlement offer from the bank and start the conversation.

• The bank will propose a settlement amount, which will be lower than your outstanding amount.

• If you don’t accept this amount, negotiate with the bank and attempt to lower the amount based on your capacity to pay.

• After the bank and you reach an agreement on a specific amount, ensure that you receive a written settlement letter.

• It should explicitly state the settlement terms, payment dates, and other conditions.

• After completing the settlement, pay the amount in full within the given time.

• Get a No Due Certificate (NOC) or Final Settlement Letter from the bank after the payment.

• After the settlement, make sure the bank updates the “Settled” status in your CIBIL report.

• This can affect your credit score, so inculcate good financial management habits to improve it in the future.

What is the legal process of loan settlement?

However, it is a legal process, and it is necessary to follow certain rules to do it.

1. Bank’s action in case of default

If you are unable to pay the loan EMI for 3 to 6 months continuously, the bank can declare it as NPA (Non-Performing Asset). After this, the bank can start the recovery process against you. Under the SARFAESI Act, 2002, the bank gets the right to seize your mortgaged property (collateral) and recover the outstanding amount by auctioning it.

2. Request a loan settlement from the bank

If you are financially weak and are unable to repay the entire outstanding amount, then you can request a One Time Settlement (OTS) or Negotiated Settlement. For this, you will have to give an application form (Loan Settlement Request Letter) to the bank, in which you will have to prove your financial position.

3. A Settlement Offer is given by the bank

After examining your situation, the bank gives a Settlement Offer, which decides the total amount you have to pay. This is usually less than the outstanding amount, but the bank’s consent is necessary for this.

4. Sign the Settlement Agreement

If you accept the offer given by the bank, you will have to sign a written agreement. It will be mentioned in it that after the settlement, the bank will not take any further legal action against you. Note that this is a very important legal document, so read it carefully and consult your lawyer.

5. Pay the Settlement Amount

After signing the agreement, you have to pay the Settlement Amount within the stipulated time frame. The payment is usually made in a lump sum.

6. Get a No Dues Certificate (NOC)

Once you pay the settlement amount, the bank has to issue you a No Dues Certificate (NOC) to certify that your loan is now fully settled. Without an NOC, the loan settlement is considered incomplete, so it is very important to get it.

What is the impact on the CIBIL score after a Loan Settlement?

A settlement can hurt your credit score. The impact can be seen in the following ways:

• After the settlement process, your credit report records that you have “settled” your debt. This entry remains in your credit history for 7 years and can be viewed negatively by lenders or other creditors, which can affect your chances of getting a loan in the future.

• Since a settlement means that you have not repaid the entire debt, when you try to get a new loan in the future, banks may reject your application or offer you loans at higher interest rates by looking at your credit score and report.

• After settlement, if you have a Loan or other credit line, your credit limit may be reduced as creditors think you may be a high-risk customer.

• If your credit score drops, it may be difficult for you to get a loan, Loan, or any other type of credit facility. This can also affect your financial stability, especially if you face a financial emergency in the future.

• When you settle with your bank, you are not paying off the entire debt, but a certain amount that is less than the principal amount. This is viewed negatively by the credit bureaus, as it shows that you have been unable to repay your debt. As a result, your credit score may drop.

How to get a loan settlement done through the Banking Ombudsman?

Here is a step-by-step process to help you know how to get a loan settlement done through the Banking Ombudsman:

1: Try to Settle the Loan with the Bank First

• Before approaching the Ombudsman, you have to first meet with your bank.

• Go to the branch, meet the loan officer, and ask for a loan settlement.

• Write a letter application describing your reason (such as loss of job, illness, etc.) and your request for foreclosure of the loan.

• Wait for a letter reply from the bank. The bank must reply within 30 days.

2: Gather Evidence

If the bank fails to reply or makes a poor offer, gather all the following documents:

• Copy of your loan agreement

• Copies of emails or letters you wrote to the bank

Bank’s reply (if any)

• Any proof of harassment or misbehavior by recovery agents (messages, calls, etc.)

• Your income proof to show your current financial condition

3: File a Complaint to the Banking Ombudsman

If the bank:

• Does not reply within 30 days, OR

• Rejects your request, OR

• Offers unfair terms

• You can file a complaint with the Banking Ombudsman.

4: How to File the Complaint

You can file your complaint in 3 ways:

Online (Fastest Way):

• Visit the RBI’s official website.

• Click on “File a Complaint”, complete the form, upload your documents, and send.

By Email:

• Email your complaint to the Ombudsman office of your state. Attach scanned copies of all documents.

By Post:

• Set out a letter with your details, bank name, complaint, and attach copies of evidence.

• Post it to the address of the Banking Ombudsman in your location (you can check this out on the RBI website).

What are the advantages (Pros) of doing a Loan Settlement?

Let us know what the benefits of doing a Loan Settlement are:

• Mental tension grows through rising debt and bank calls. On settlement, you are free from this concern, and you may concentrate on a better financial status again.

• If your Loan dues have become very high, and you are unable to repay them, then a settlement can give you great relief.

• When you do not pay your Loan continuously, the bank can send a legal notice to you and can also send a recovery agent.

• The interest on Loans is very high, which can be up to 30-45% per annum. If you are not paying on time, the interest and late payment fees keep increasing continuously.

• While a settlement will bring down your CIBIL score, provided you exercise financial responsibility after the settlement and settle your other loans and bills punctually, you will improve your score over time.

• In a Loan Settlement, you pay a specific sum at one time, which settles your debt entirely. It may be helpful to the people who desire to come out of debt by increasing a little money at a time.

What are the disadvantages (Cons) of doing a Loan Settlement?

Let us know in detail what the disadvantages of doing a Loan Settlement are.

• Doing a Loan Settlement can spoil your relationship with the bank. The bank sees it as if you have not fulfilled your financial responsibilities completely, due to which you may face problems in banking services in the future.

• The biggest disadvantage of a Loan Settlement is that it spoils your CIBIL score. When you settle with the bank and pay a lesser amount instead of paying the entire dues, the bank reports it in “Settled” status. This status can remain in your credit report for up to 7 years, which may make it difficult to get a loan or a new Loan in the future.

• If you have done a Loan Settlement once, banks and other financial institutions may consider you a “high-risk customer”. This may cause problems in getting a home loan, personal loan, or business loan, or the bank may give you a loan at a higher interest rate.

• In some cases, when you go to take a loan from another bank in the future, the bank may ask you to repay the entire previous settlement amount after looking at your credit history. That is, if you had settled by paying Rs 50,000 on an outstanding amount of Rs 1 lakh, then the new bank can demand the remaining Rs 50,000 from you.

• If you have settled a Loan with a bank, then the same bank can refuse to issue you a Loan again in the future.

Conclusion

Dealing with loan problems can be frustrating, especially when you are dealing with a financial crisis. Everyone would feel powerless when the bank ignores their request to settle the loan or is unfair to them. Most people just give up or compromise on whatever the bank says in these situations. But you don’t have to cry yourself to sleep. Bank Ombudsman is a good and useful system established by the Reserve Bank of India (RBI) to protect your rights as bank customers.

If your bank fails or refuses to assist you in agreeing to the loan, or there is harassment by recovery agents, or if an unfair settlement amount is quoted and found to be excessively high, then and only then can you approach the complaint to the Bank Ombudsman. It’s a simple and free process, and you don’t need to nominate any solicitor or pay any fee. You simply need to try to get it sorted out with your bank in the first instance. If they don’t respond within 30 days or you aren’t satisfied with their answer, you can complain to the Ombudsman.

The complaint can be made online, by email, or by post. Once your complaint is received by the Ombudsman, they will review the case and speak to the bank on your behalf. If needed, they will ask both sides to attend a meeting to sort out the problem. If the bank is guilty or has misbehaved with you, the Ombudsman can order the bank to refund your loan in a reasonable time or even grant compensation for delay or mental harassment.

Frequently Asked Questions (FAQ’s)