Once upon a time, Anil Chawla of Bhopal was a bright young engineer just out of the prestigious Indian Institute of Technology, Mumbai. Unlike most of his classmates, he did not go to the US for higher studies but decided to stay back and start his own manufacturing unit producing caps and containers for soya oil.

For that, in 1987, he borrowed Rs 14 lakh from a public sector bank. Fourteen years later, he was an non-performing asset (NPA) for the bank and reading law books to save his skin.

Now 48, Chawla's voice betrays a sense of bitterness that the bank refused him the additional funds he sought, which could have let him make a go of his business. Worse, he says, he was "harassed to the core and humiliated by the officers in the bank for one-and-a-half decades," after which he paid the bank Rs 35 lakh that had become due.

"It was my father's entire life's savings," says Chawla with guilt. But he is more of an odd example, who managed to pay off the entire amount. But what happens if you can't?

What is an NPA?

For a bank or a lending institution, an NPA or bad debt is usually a loan that is not producing income. Earlier it was largely applicable to businesses. But things have changed with banks widely extending consumer loans (home, car, personal and education, among others) and strict asset classification norms.

If a borrower misses paying his equated monthly instalment (EMI) for 90 days, the loan is considered bad, or an NPA. High NPAs are a sign of bad financial health. This has wide-ranging ramifications for a bank, especially in the stockmarket and money market. So, as soon as a debt goes bad, the banks want it either made better or taken out of their books.

The Genesis of an NPA

There are many reasons as to why a loan goes bad. For a business, it could be because it fails to take off. In fact, Chawla was among the few who paid up the entire amount even though it was after a long period. Many do not have the wherewithal to do so.

Such a situation may arise because of sudden health expenditure or job loss or death. Often, as in the US today, it can be because of over-leveraging, when consumers borrow against most of their assets and, maybe, have unsecured loans too.

In such a case, any hit on income can jeopardise all repayments. They, however, can file for bankruptcy under Chapters 7, 11 and 13 of the United States Bankruptcy Code. Indians don't have such an option.

In India, the situation has worsened due to banks aggressively pushing loans, even unsecured ones, to individuals to prevent idle assets on their books. Arun Saxena, president and founder of International Consumer Rights Protection Council, an NGO, says most customers in India are not financially educated and banks are luring them to take more and more loans, often without checking their financial position.

Mary D'Souza (name changed), 50, took a loan from a bank, which pushed in another loan after a while saying that her repayment was really good.

But when her husband fell ill, repayment became difficult. This was in 1999. Soon she started getting threat calls and a visit from the bank's recovery agents (read: goons). To stop this, she took a loan from another bank to repay the first. This, however, did not reduce her liabilities.

Today, with a monthly income of Rs 14,000 and a sick husband and two children to look after, she is expected to pay banks Rs 20,000 a month to clear the loan. She owes six banks and each day is a terrorising experience.

"I cannot take the harassment any more. I want to put a full stop. I don't know what the consequence will be. Even if it means death I want to put a full stop." She can afford to pay only

Rs 1,000 to each bank. But only one, Citibank, is willing to accept it.The question is what do you do if you are unable to repay your debts and have become an NPA?

The law and NPAs

If you realise that you will not be able to repay your loans, take action. There are three stages --  before you default, after you default, and after your loan becomes an NPA. In the first two cases, the initiative rests with you, although in the second you are likely to get reminders. In the last stage, the initiative shifts to the bank.

When you take a loan. Mumbai lawyer Deven Dwarkadas warns against issuing post-dated cheques. "Ensure that you don't give post-dated cheques unless you are sure that your account will always have that amount," he says.

A cheque bounce is a criminal offence and the borrower can be imprisoned for a maximum term of 24 months or asked to pay double the amount. In fact, a bank has threatened D'Souza with criminal proceedings unless she pays double the amount.

Before and after default, but before loan becomes NPA. If you find you will default on a secured loan, it is best to get the bank involved, sell off the secured asset and other assets, if needed, and pay off the loan immediately.

Else, approach the bank for an immediate settlement. If it keeps hanging, the interest and penalties could add up to an unmanageable amount. Remember, the prime objective of the bank is to recover as much as it can.

Says debt counsellor V.N. Kulkarni, "The banks broadly decide the settlement amount based on the value and availability of security, time required in liquidating it, and the cost of doing so." Never borrow from another bank to pay off a loan.

Unsecured loans are best avoided. However, if you have one that you are likely to default on, try to pay it off before the bank attaches your property, in which case even things like your TV, refrigerator and computer get valued.

If you have outstanding amounts on your credit card, then you could take a personal loan and pay off the credit card issuer as this will almost halve the interest you are paying, and buy you time in the process.

Alternatively, if you have more than one credit card, you can use the balance transfer facility to reduce the rate at which you are paying interest on the outstanding amount. You can go for a new card as well. The interest rate on transferred balance is usually 0.5-1.75 per cent. If you have nothing to give, seek police protection.

After a loan becomes an NPA. Activist and lawyer Anand Patwardhan says that as soon as you have become an NPA, it is important to make an application under the Right To Information and get a copy of the loan documents in the custody of a PSU bank.

"There have been instances when the bank has tampered with documents to change amounts and dates," says Patwardhan. For private banks, you can compare your copy of the documents with what the bank has.

At this point, the bank can slap a legal notice on you, which is different from the reminders it sent you earlier. Once you get the notice, speak to the banks and ask for a settlement. If you have had a clean repayment record, then explain to the banks that it is the only time that you have failed to pay.

You could also ask for the loan to be restructured saying if you get some more time then you will be able to repay the full amount in more instalments. Ensure that you have a copy of the notices. If you don't, you have a right to ask the bank for one. Only after the specified period in the notice can the bank take action against you.

According to Kulkarni, banks are allowed to reach a settlement in any of the following ways:

One-time settlement. This is a good way if you have some money, which may not be enough to repay your entire liability. Under this, banks try to clear the entire settlement in one go, usually, at a lesser value.

Lok adalats. These are third-party adalats that are used only by a few PSU banks, and that too, for relatively small loans. "This is a better way of settling  loans outside the court (than through debt recovery tribunals)," says Patwardhan. A.K. Choudhary, general manager at Bank of India [Get Quote] and the man who handles its NPAs, says: "The good part is that there is no court fees. Although we usually use lok adalats only in the rural and semi-urban areas, we have to start using them in metros also."

Debt Recovery Tribunals (DRTs). If your loan amount is more than Rs 10 lakh, then the Debt Recovery Act, 1996, kicks in. After your loan goes bad, the bank can approach the DRT, which issues you a notice. You have to reply within a month of the issue date, following which a hearing is held in the presence of both the parties and the case is settled. If you do not reply, the DRT can come to your doorstep and attach your assets. However, says Patwardhan, "they are only concerned about the bank."

Debt Recovery Appellate Tribunal. In case the bank has taken your assets or  filed a notice when you are not liable to pay, then you can approach this tribunal. The person, however, has to deposit 50 per cent of the amount before filing an appeal.

Securitisation Act. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (Sarfaesi Act) provides special powers to lenders and asset reconstruction companies to take over assets of borrowers without first going to court. This also applies for amounts above Rs 10 lakh.

It gives the borrower 60 days after sending a notice to go to the bank to settle the loan or file an appeal in a court. Else the court will attach the property in case of secured loans. Sometimes, even if your loan is smaller, banks add the penalties and interest charges to cross the Rs 10-lakh level.

Asset Reconstruction Companies (ARC). These come into the picture only for business loans since that is the only kind they buy. There are three such companies in India -- Asset Reconstruction Company of India (Arcil), Pegasus and ASREC (India). They buy bank NPAs at a discount along with the right to recover the money. They then try for financial solutions that would fetch them more than they paid.

For that, they can consolidate, recover through a settlement, or resell the loan. They often try to deal directly with the borrower. The best thing about them is that they try to manage debt, rather than just eliminate it. This usually leads to a mutually beneficial settlement. Says S. Khasnobis, managing director and CEO, Arcil: "You should see the defaulter as a human and not a criminal."

When Debt Pays A Visit

One often hears of bizarre means banks adopt to recover bad debt. One is 'debt recovery agents' (DRAs), as the banks call, others call them goons. Over the last month, harassment by DRAs has reportedly led to a death and a suicide in Hyderabad.

The Monopolies & Restrictive Trade Practices Commission has also launched a probe against the concerned banks. In these circumstances, banks can be as bad as the moneylenders of yore, says consumer activist and lawyer Anand Patwardhan.

Banks continue using DRAs despite a Supreme Court order in March 2007 directing them not to. "Recovery agents are illegal," says lawyer Deven Dwarkadas. "Anyone being harassed must complain to the police. No bank officer is also allowed to interfere in case the amount is less than Rs 10 lakh. Only the court can do something here."

And, that too is limited to sealing assets. If the person has nothing to give, then it can only wait. It certainly cannot take the life of a person for not repaying.

How to deal with DRAs?

If you receive threatening calls, inform the police and inform the bank that you are reporting the matter to the police. Complain bitterly to the bank. Threaten litigation if need be. Keep an audio recorder ready to take precautions against further calls.

In the conversation, try to get the agent to clearly say what he wants from you, the name of his company and which bank has hired him.

If the goons pay you a visit, file a complaint at the nearest police station. Take photographs of the person who has come to your house and submit these to the police. You can sue the bank individually, or approach a consumer action group. Some are listed below:

1. Abhay Credit Counselling Centre  (Bank of India): www.bankofindia.com/ home/abhay.asp

2. Disha Credit Counselling Centre (ICICI Bank [Get Quote]): www.dishafc.org

3. International Consumer Rights Protection Council (ICRPC): www.icrpc.org

4. National Consumer toll free helpline: 1600-11-4000

5. Consumer Education Research Centre (CERC): www.cercindia.org

6. Citizen Consumer and Civic Action Group (CAG): www.cag.org.in

7. Consumer Guidance Society of India (CGCI): www.cgsiindia.org

8. Voluntary Organisation in Interest of Consumer Education: www.consumer-voice.org

9. Consumer Advantage: www.advantageconsumer.com

Some of the organisations may have a nominal membership fee of approximately Rs 200 a year.