Defaulted on an NBFC Loan? What Happens Next and What You Can Do
Updated: 5 days ago
Many personal loans, consumer durable loans, two-wheeler loans and app-based loans in India come from non-banking financial companies (NBFCs) rather than banks. When EMIs start bouncing, borrowers often wonder whether an NBFC is treated differently from a bank, and what it can actually do.
The short answer: NBFCs are regulated by the Reserve Bank of India (RBI), they follow broadly similar rules to banks on classifying overdue loans and on recovery conduct, and you have the same basic rights. Here is what to expect and what you can do.
Key takeaways
NBFCs are RBI-regulated. Their recovery agents must follow RBI conduct rules, including no threats, abuse or calls at odd hours.
Overdue loans move through SMA-0, SMA-1 and SMA-2 stages before becoming a non-performing asset (NPA) after more than 90 days overdue for most NBFCs.
An NPA account returns to "standard" only after the entire arrears of interest and principal are paid.
SARFAESI action by NBFCs is limited to secured loans of Rs 20 lakh and above, and only for NBFCs with assets of Rs 100 crore or more.
Talking to the NBFC early gives you the most options. Settlement is possible but is reported as "settled" and affects your CIBIL score.
Need to talk it through? Chat with us on WhatsApp or Book a free consultation.
How an NBFC classifies a missed EMI
RBI's income recognition and asset classification norms, tightened in November 2021, require lenders to flag overdue accounts daily. The stages are:
SMA-0: overdue up to 30 days
SMA-1: overdue more than 30 and up to 60 days
SMA-2: overdue more than 60 and up to 90 days
NPA: overdue more than 90 days
Smaller NBFCs in the base layer were given a glide path to move to the 90-day NPA rule by March 2026, so the 90-day mark now broadly applies across NBFCs as it does for banks.
One rule surprises many borrowers. Once your loan is an NPA, paying one or two EMIs does not bring it back to normal. RBI's clarification says the account can be upgraded to "standard" only when the entire arrears of interest and principal are paid. For a deeper look at this stage, see what happens when your personal loan becomes an NPA.
What NBFCs typically do after a default
Reminders and calls
First come SMS, emails and calls from the NBFC or an outsourced collection agency. This is legal, within limits. Under RBI rules, recovery agents may contact you only between 8 am and 7 pm, must identify themselves, and must not use threats, abusive language, or contact your friends and colleagues to shame you. Digital lenders must also tell you in advance, by email and SMS, which recovery agent is authorised to contact you once you default. RBI has also notified updated recovery conduct rules that apply from 1 January 2027; we explain them in our guide to RBI's new loan recovery rules.
Credit reporting
Overdue status is reported to credit bureaus such as CIBIL. Each month of delay shows up in your report, and an NPA, write-off or settlement remains visible for years.
Legal notices and recovery proceedings
For unsecured loans, the NBFC may send a legal notice, start arbitration if your agreement has an arbitration clause, or file a civil recovery case. If you had given cheques or an auto-debit mandate that bounced, it may also file a complaint under the law on dishonoured cheques or electronic payments. Never ignore a legal notice; reply within the time given, ideally with advice.
SARFAESI for secured loans
The SARFAESI Act lets a lender take possession of secured assets without going to court first. For NBFCs, a February 2021 government notification limits this to NBFCs with assets of Rs 100 crore or more, and to secured debts of Rs 20 lakh and above. Most personal loans are unsecured and well below this limit, so SARFAESI usually does not apply to them.
Your options after an NBFC loan default
1. Talk to the NBFC before it becomes an NPA
If you are in SMA-0 or SMA-1, call or email the NBFC's grievance or collections team. Explain the reason (job loss, illness, business slowdown), share proof, and propose what you can pay. Ask about a revised EMI, extended tenure or a short payment holiday. Get any agreement in writing.
2. Ask about restructuring
Restructuring changes the loan terms, usually lowering the EMI by extending the tenure. It is at the lender's discretion and may be reported on your credit report, but it keeps the account alive and avoids settlement.
3. Consider settlement if you truly cannot repay
If your income has fallen sharply and full repayment is not realistic, a one-time settlement may be possible. The NBFC decides whether to accept and at what amount. Always get a written settlement letter on the NBFC's letterhead before you pay, and pay only to the NBFC's official account. Remember that settlement is reported as "settled", which affects your CIBIL score.
4. Escalate complaints properly
If recovery agents harass you, or the NBFC does not respond to your complaint, use its grievance redressal officer first. If there is no reply within 30 days, or you are unhappy with the reply, you can complain to the RBI Ombudsman at cms.rbi.org.in, free of cost. The complaint must generally be filed within one year of the NBFC's reply, and it cannot be about a matter already pending in a court or tribunal.
Frequently asked questions
Is defaulting on an NBFC loan different from a bank loan?
The basic process is similar. NBFCs follow RBI rules on asset classification, fair practices and recovery conduct. The main practical difference is that NBFC use of SARFAESI is restricted to larger secured loans.
Can an NBFC send recovery agents to my home?
Agents may visit, but they must carry identification and authorisation, behave politely, and stay within RBI's conduct rules. Threats, abuse and humiliation are not allowed, and you can complain if they happen.
Will paying part of the overdue amount stop the NPA?
Part payment reduces what you owe and shows good faith, but once the account is an NPA it returns to standard only after all arrears are cleared.
Can I settle an NBFC personal loan?
Many NBFCs do consider settlement when a borrower cannot repay in full, but there is no fixed percentage and no guarantee. The settled status will affect your CIBIL score.
Talk to Loan Counsel
Loan Counsel helps borrowers across India deal with NBFC and bank loan defaults, recovery pressure and settlement talks. Founded in Bengaluru in 2025, we have assisted 1,500+ clients and helped resolve Rs 40 Cr+ of debt. We can look at your loan papers, explain where your account stands, and help you choose between restructuring and personal loan settlement.
If you decide to work with us after the free consultation, our fee is up to 1% of the outstanding loan per month for 3 to 6 months, with a minimum of Rs 5,000 for loans under Rs 5 lakh. The fee is agreed in writing before any work starts, and we will tell you honestly if we think you can handle the matter yourself.
WhatsApp us: +91 87221 15542 or Book a free consultation. The first consultation is free.
This article is general information about Indian lending rules, not legal advice for your specific case.
About the author
Written by the Loan Counsel team. Loan Counsel is a Bengaluru-based loan settlement and debt advisory firm, founded in 2025 by Mohammad Faizan, Rahil Saqlain Ali and Khasim Khan. We help borrowers across India settle personal and business loans and credit card dues legally, and deal with recovery harassment. Meet the team.
Comments