Supreme Court Asks RBI to Enforce Loan Recovery Norms to Prevent Forceful Vehicle Seizure by NBFCs, Banks

New Delhi, Sep 18 (KNN) The Supreme Court has directed the Reserve Bank of India (RBI) to ensure genuine compliance by banks and Non-Banking Financial Companies (NBFCs) with its guidelines on loan recovery, observing that borrowers cannot be dispossessed of hypothecated assets through force, stealth or without due legal process.

A bench of Justices PS Narasimha and Alok Aradhe issued the direction while allowing an appeal by truck owner Hari Dutta Sharma against an Allahabad High Court order. 

The Court ordered Cholamandalam Investment and Finance Company Ltd to close his loan accounts and refund Rs 4.5 lakh, being the sale proceeds of his vehicle, with six per cent annual interest. It also awarded Rs 10 lakh compensation for mental agony and loss of livelihood, along with Rs 50,000 towards litigation costs.

Contractual Repossession Right Not Unrestricted

The Court held that a financier may have a contractual right to repossess a financed vehicle, but such a right must be exercised in accordance with law, the loan agreement and applicable RBI norms.

It said lenders cannot use muscle power or recovery agents to forcibly seize vehicles. Repossession clauses must also comply with the Indian Contract Act, 1872 and specify safeguards such as notice, lawful possession procedures and a final opportunity to repay before sale or auction.

RBI Asked To Ensure Compliance

The Court noted that RBI guidelines and master circulars on fair recovery practices have existed for years but directed the regulator to take effective steps to ensure they are followed by scheduled commercial banks and NBFCs.

The direction followed a case in which the borrower's truck was allegedly taken around 1 am after its steering lock was broken, without the required seven-day notice. The Court held that the contractual right to repossession had not accrued because the stipulated notice was not served.

While it did not reverse the vehicle sale, the Court ordered the finance company to close both loan accounts and refund the Rs 4.5 lakh sale proceeds with interest.

(KNN Bureau)