SC asks RBI to ensure banks, NBFCs seize financed vehicle lawfully

A bench of justices PS Narasimha and Alok Aradhe held that financial institutions cannot use force, stealth or arbitrary methods to recover loans, even when borrowers have defaulted on repayment.

Highlighting RBI's directive that a financed vehicle can be seized only through "lawful means", the Supreme Court on Wednesday directed the federal bank to enforce its guidelines on non-banking financial companies and scheduled commercial banks to ensure that borrowers are not dispossessed of their hypothecated vehicles without due process of law.

The top court's direction came in a judgement in which it ordered Cholamandalam Investment and Finance Company Ltd to close the loan accounts of a truck owner, and refund Rs 4.5 lakh realised from the sale of his vehicle with six per cent annual interest.

It also asked the finance firm to pay Rs 10 lakh compensation for mental agony and loss of livelihood caused by the unauthorised repossession of his vehicle.

Justice Narasimha, writing the judgement, said, "It is well-settled in law that a financier's right to take possession of the financed vehicle in the first instance, is a matter of contract, where an agreement confers such a right, there is no legal impediment to its exercise unless the contract is unconscionable or opposed to public policy." "Such clauses of self-help repossession are not, in themselves, an evil to be eradicated: they are what make it commercially feasible for institutions to extend credit, against the security of the very asset financed, to borrowers of modest means, truck operators and small transporters among them, who possess no conventional collateral and would otherwise remain outside the reach of institutional finance," the verdict said.