Loan Alert. When your debt is sold, what next?

Sanjay was surprised to receive a notification from a company named Phoenix ARC asking him to pay up the dues on his personal loan. What was even odder was the mention of the fact that his bank had sold the personal loan to the company.

Banks have been selling loans to other entities for a long time now. So far, they had only been offloading large corporate loans that were delinquent. But in recent times, they have also started selling consumer loans that have faced defaults.

The company in this case — Phoenix ARC — is an Asset Reconstruction Company (ARC), formed under the SARFAESI Act, 2002, to help banks recover their delinquent loans. There are currently 14 such ARCs functioning in India. Hence, if you get a notice from any of them, you need to settle your loan account with the ARC instead of your bank. Here are a few things you need to keep in mind during the process.

You should expect to receive two sets of communications when your loan is sold by your bank. One is from your own bank detailing such sale. The letter will mention your loan account number, the sale of the loan to the particular ARC and the date of assignment (transfer) of such loan, etc. The second letter is from the ARC to whom your loan has been sold, asking you to make the payment and also mentioning the possible mode of payment and the list of collection agencies.

If, due to some reason, you have received only one letter, double-check with your bank before you proceed. Along with these notices, you will also receive a statement of account, which gives a detailed history of the transactions in your loan account — payments made and dues outstanding. From the date of assignment, the ARC has the right to collect outstanding dues from you.

They are free to appoint agents or initiate any other actions allowed by law for recovery.

When an ARC approaches you, asking you to pay your dues, there are two ways in which you can settle your account. One, and the most obvious, is by making the full payment. But if for some reason, you are unable to do so, ARCs may also agree upon a lower amount — a portion of the total dues.

More than often, in fact, ARCs will be willing to settle the account for a much smaller amount, particularly in case of personal loans and credit cards.

ARCs usually buy bad loans from banks at a price based on the possibility of recovery of the loan. For instance, in case of mortgage loans, where the possibility of recovering the amount from sale of the property is higher, ARCs may buy the loans at a 40-50 per cent discount from banks. But the discount is at about 80-90 per cent in case of unsecured loans, such as personal loan or credit cards, says P Rudran, Managing Director and CEO, ARCIL.

“Banks usually sell loans of delinquent consumers whose repayments are overdue for more than six months to ARCs. The ARCs buy these loans at a deep discount and are usually willing to work with the underlying consumer to offer the right terms to recover the loans,” says Mohan Jayaraman, Managing Director, Experian Credit Information Company of India.

But making part-payment instead of full does have its shortcomings when CIBIL records are updated. Remember, that it is now the ARC that will report to CIBIL on payments received on the loan account. Depending on whether you made full or part-payment, your account will reflect ‘closed’ or ‘settled’ status, says Harshala Chandorkar, Senior VP, Consumer Services and Communication, CIBIL.

“Though there will be no impact of the ‘settlement’ flag on the customer’s CIBIL TransUnion Score, his credit history will show a ‘Settled’ status in his CIBIL Report and there will be Days-Past-Due reflecting on the report since the payment on the loan has not been timely.

Each bank has its own policy of viewing at a ‘Settled’ status and will decide on the consumer’s future loan applications accordingly,” adds Chandorkar.

In the case of credit cards, reinstating a credit card (post default) will depend on individual bank’s policies and will differ from case to case.

In any case, once you have settled your account, be sure to collect your no-dues certificate from the ARC.

Also, in case of home loans, remember to take back all your original documents from the ARC.