What happens to personal loan, if the borrower dies

When the borrower expires without clearing the loan taken by him, his legal heirs are liable to the extent of the assets of the deceased they inherited.

The bank is not different from other creditors and only gets priority and attachment of liquid funds through the process of the court.   Personal loans without the security of a third party are very remote.  Further Bank must have issued reminders or EMIs and recall notices also. The statement that family members residing in the address are very very rare as the bank branch must have issued notices and recovery agents might have contacted personally or through phones before proceeding further.  There is no such insurance as assumed for personal loans. in India.

In general, Banks that are having outsourcing recovery agents only entertain personal loans, and they have such arrangement to sell away such personal loans to an outside agency for a discounted rate, and once the loans are handed over to an outside agency, their ways of recovery are almost inhuman.  One can imagine their guts in confiscating the car of an HC Judge when parked at Station.  If the personal loan was granted in violation, the sanctioning officer is personally liable and the bank does not hesitate to recover the same from him or through stoppage or not giving increments for negligence in performing advance.  

All this is subject to a limitation period of 3 years . Those challans of credit signed between 2007 and 2010 may extend the limitation period, only if they are signed by borrowers.  I am afraid that banks do not take such steps risking their reputation and violating norms while recovery of personal loans, as they value good money and do not wish to spend good money when there are no chances of recovery.

Dear Querist,

Your views on the situation is absolutely right.

The bank cannot ask the decedent's remaining family members or legal heir to repay a personal loan or credit card bill if the decedent passes away without making the required payments. There is no collateral because it is an unsecured loan, hence the property cannot be attached.

Banks write it off in this case, adding it to the NPA account.

Hello,

I agree with Shivramprasad sir's view that legal heirs are liable to pay the outstanding to the extent they inherit the assets of the deceased. 

The query was from an Advocate of the High Court and not a minor issue and much thinking is necessary from the Bank's point of view, law and practice.

Although the Bank can recover an outstanding amount in personal loan from LRs of deceased through his (deceased borrower's) estate, even if it is "unsecured debt",  yet the subject loan is barred by limitation in the instant case.

Since a personal loan is a loan with no security, no security investment is required for distributing the funds. In the unfortunate circumstance that a borrower of a personal loan passes away during the middle of the term of repayment, the lenders are helpless. This is so because there is no collateral supporting the loan.

Because of this, if a borrower fails on a personal loan, the lender is required to write off the fair market value of the remaining sum. The legal relatives of the individual who passed away cannot be asked to pay the outstanding debt by the lenders.
 

Shruti, do you happen to have a case law supporting this view?