What Are the Consequences of Non Payment of Loan?


Loan is a contract, between two parties where money, property, or other material goods is given to another party in exchange for future repayment of the loan value or principal amount, along with interest or finance charges. Types of the loan may include secured and unsecured loan which is defined under Sec 5(n) of the Banking Regulation Act 1947.

Non-payment of loans can have civil or criminal implications, depending upon the facts and circumstances of the case.


Generally, non-payment of loans is a civil offence. Contractual obligations being civil in nature, the breach of the same won’t have criminal repercussions. Thus, failure to pay loan would not lead to arrest. If a person defaults on loan, then there are different course of actions that can be taken by the lender. In case of a secured loan, the underlying mortgaged assets can be repossessed by the lenders under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act.

If the repayment of the loan amount is overdue by 90 days, then such a debt is classified as a non-performing asset (NPA). Subsequently, the lender serves a 60-day notice to the borrower within which the borrower is required to clear the dues. Failure to repay the amount within the said period, the lender can exercise his right to sell off the assets of the borrower, after serving a 30- day public notice mentioning details of the sale. He can also take recourse to the provisions of Insolvency and Bankruptcy Code 2016.


Non-payment of a loan becomes a criminal offence only when there is a criminal or fraudulent intent involved. This principle was upheld in the recent case of Satishchandra Ratanlal Shah vs the State of Gujarat, In this case, it was observed that since mens rea is a pre-requisite for every crime, criminal proceedings cannot be initiated against the loan defaulter unless it is shown that there was a prima-facie criminal intention at the beginning of the loan transaction.

The court by citing the 2012 case of Gian Singh v. State of Punjab observed that if civil offences are criminalized then there would be no line of distinction between civil and criminal offences.

Thus, if it is proven that at the time of entering into an agreement, the borrower dishonestly forged the documents, or diverted the loan amount for any purpose other than the sanctioned purpose, then Sec 420 of IPC, which deals with cheating, will be attracted. If the default has happened in the ordinary course of business, without any intention to defraud or with regard to conduct of business in a dishonest manner no criminal liability can be fastened. In these circumstances, the only option left to the lender is to attach the property of the borrower and adjust the sale proceeds against the borrowed money. No further course of action can be initiated.

In 2014, Vijay Mallya’s 9000 crore scam came into the light, where he was slapped with the charges of cheating, criminal conspiracy, money laundering and diversion of loan funds. It was alleged by the CBI that Mallya diverted the loan funds which were granted to Kingfisher Airlines by lenders to different companies owned by him. For instance, he diverted 3,432.40 crores through “over-invoicing” of lease rentals of aircraft between April 2008 and March 2012. Also the CBI claimed that there were different kinds of oral and documentary evidence which indicated that Mallya’s intention was to cheat the banks as he had made several misrepresentations and gave false information. An arrest warrant was issued against Mallya; however, he fled the country before the arrest could be made.

In the wake of this scam, different kinds of amendments to statutes were made and new statutes were also introduced. RBI issued a master circular in July 2015, through which it introduced the concept of ‘wilful defaulter.’ As per this circular, the following categories of borrowers are treated as wilful defaulters:

1) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.

2) The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

3) The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

4) The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/lender.

The term ‘unit’ includes an individual, juristic persons and business enterprises as well. The circular explicitly states that a unit shall be categorized as a wilful default only when the default made by the unit was intentional, deliberate and calculated. Different statutes prescribe procedure for investigation, actions to be taken against such defaulters and also prescribe punishments for the offence.


Apart from Sec 420 of the IPC, which deals with cheating and dishonestly inducing delivery of property, different charges can also be levelled against wilful defaulters. According to the 2015 master circular of RBI, criminal actions shall be initiated against the wilful defaulters, under the provisions of Sections 403 (Dishonest misappropriation of property) and 415 (Cheating) of the IPC, 1860.

Further, a new section, Sec 447, has been included in the Companies Act, 2013, which deals with fraud committed in relation to the affairs of a company. According to the said provision, if any person commits an act or omission, or conceals any fact or abuses position, with the intent to deceive or to injure the interest of the company or its shareholders or creditors, such an act shall be investigated by the Serious Fraud Investigation Office (SFIO) established under the Act. If the person is found guilty, he may be punished with imprisonment of up to 10 years.


Thus, non-payment of loan can have criminal implications only if it is proven that there was a criminal intention. Even though there are laws that deal with wilful default, due to the recent case of PNB scam of 11,000 crores, which involved the diamantaire Nirav Modi, it was felt that the current laws were not sufficient to implicate those people who would commit such economic offences and flee the country to evade the legal proceedings. Accordingly, the Parliament passed The Fugitive Economic Offenders Act in August 2018 which effectively deals with wilful bank loan defaulters, fleeing the Indian jurisdiction. The Act provides for different stringent actions such as attachment and confiscation of their property and disentitling them from defending any civil claim.






This article is authored by Karishma Rajesh, student of BA LLB at  ILS Law College, Pune.

Also Read – White-Collar Crime In India – Detail Analysis

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