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Proposed administrative procedure - CIVIL.03
Improve resolution of disputes involving defaults of loans


  1. Preface
  2. CIVIL.03.02 --- Loans without collaterals


My proposed procedure CIVIL.03 deals with a class of civil cases --- cases related to defaults of loans.

CIVIL.03.01 --- Loans against collaterals

  1. If a person owns ONLY one flat/plot, this code will NOT apply on the loans issued agianst that flat/plot.

  2. If a person wants loan against a flat/plot he owns, he must own one more flat/plot. The sale of that flat/plot will be frozen till the loan on the second flat/plot is NOT cleared.

  3. The RBI will publish a maximum house loan rate. If the collateral is house, the interest rate MUST be below that rate. If the collateral is anything other than a house, the rate can be at most twice the maximum house loan rate.

  4. The loan will NOT be fixed interest rate, and there will NOT be any pre-payment penalty. The rate will be revised every year subject to change in maximum house loan rate as published by RBI.
    Example : Say maximum house loan rate published by RBI was 10%. Say a person obtains loan at 8%, i.e. 0.8 times the max rate. Now a year later, say max rate is 12%. Then the lender can charge AT MOST 9.6%.

  5. The interest will be compounded quarterly, and will be calculated ONLY on the opening balance.

  6. There can be ONLY one loan against one peice of collateral.

  7. The lender and borrower shall open a bank account specific to the loan issued. The lender MUST deposit the loan amount in this account which will be withdrawn by the borrower, or the bank will send the funds to appropriate account on behalf of borrower.

  8. The lender's income tax ID must be registered. IOW, if a person DOES NOT have income tax ID, he cannot lend money to anyone.

  9. To make payments, the borrower will deposit the money in the account meant for administering loan, and the bank will tranfer the funds in the lender's account.

  10. The lender and borrower may link their bank accounts with the loan administering account. In this case, the borrower only needs to instruct his own bank to send payment to the bank, which has the loan administering account. And upon recieving the payment, the bank which has the loan administering account will send the payments to the borrower's bank account.

  11. The interest calculations will be done by the bank, and NOT by the borrower or the lender.

  12. At the year end, the bank will generate the statement showing opening/closing balances, individual payments, interest paid and principal repaid. The bank will give copies to the borrower, lender and the income tax dept.

  13. If amount due exceeds the original principal lent by twice the maximum house loan rate the lender may ask the court to auction the collateral. The court can subtract the administration cost, give the lender amount that is due, and give remaining amount to the borrower.

  14. If the amount due becomes equal to the depriciated value of the product, the lender can ask the court to confiscate the collateral, hold an auction and repay the amount.

  15. If a lender has lent an amount to a borrower NOT via loan administering account, the loan will considered as void.

CIVIL.03.02 --- Loans without collateral

  1. If a person intends to obtain loans without collateral, he must open a "loan administering account". One individual can open ONLY one such account for ALL non-collateral loans.

  2. If a lender wishes to loan an amount to a borrower, he MUST deposit the money in loan administering account, or else the loan will be considered as void, except when lender is close relative of the borrower, and loan is interest free.

  3. The borrower must also repay the amount by depositing the money in the loan administing account. A payment given NOT via loan administering account will be considered as void.

  4. The lender and borrower at the time of taking loans, i.e. depositing the money in loan administering account, will decide the interest rate. The interest cannot be more than twice the maximum house loan rate published by RBI in that month.

  5. The interest will be ALWAYS floating, and there will no prepayment penalty. The interest rate will change wrt change in maximum house loan rate as published by RBI. eg say a borrower had obtained loan at 15% when maximum house loan rate was 10% i.e. interest on rate is 1.5 times the max house rate. Now if RBI changes max house rate to 12%, the interest rate on the loan will also change to 18%.

  6. The interest will be componded quarterly i.e. unpaid interest will be added to principal and will become new principal. And the interest will be calculated on the opening balance of the principal.

  7. When the borrower repays the debt, he MUST deposit the amount he intends to repay in the loan administering account. The bank, which runs the loan administering account, will distribute the funds as follows :
    1. If X% of the outstanding amount is interest free, then (X + (100-X)/2)% amount will be given to those who have given interest free loans in the propertion of their outstanding amounts.
      Example: Say outstanding debt on a person is Rs 100,000, of which Rs 60000 i.e. 60% is interest free loans. Say person decides to pay back Rs 10000. Then [60 - (100-60)/2]% = 80% of the amount i.e. Rs 8000 will go to those who have given interest free loans.
    2. the remaining amount will be distributed in the reverse ratio of their interest rates i.e. those with lesser interest rates will get higher share.
      Example : say two lenders have lent money at 10% and 15% rate of interest; say the borrower deposits Rs 2000 for repayment of the loan; the bank will pay the lenders in ratio 15:10 i.e 3:2 i.e. the lender who has lent at 10% will get Rs 1200 and lender who has lent at 15% will get Rs 800. IOW, those with lower interest get more money back, till their loan is repaid.

  8. If a person declares bankruptcy, the court will auction his assets, except assets needed for survival like a house, one vehicle, personal goods etc, and pay the borrowers in the reverse ratio of accumulated interests due.

Draft of the act to create procedure CIVIL.03

One law needs to be passed in Assembly to enact CIVIL.03. To see the draft, please click here.

     Now citizens can ask MLAs to pass this Act. But IMO, it will be wiser for citizens to first enact procedure LM.02 then use LM.02 to pass this CIVIL.03 draft WITHOUT any help from Councilors. To know about procedure LM.02, please click here.

If you have any other question, please mail it to Thousand thanks in advance.

Next - CIVIL.04 : Managing charities