Summary of this article
Supreme Court bars lenders from forcefully seizing financed vehicles.
RBI directed to enforce existing vehicle repossession guidelines.
Borrowers must receive lawful process before vehicle repossession.
Missing the equated monthly instalments (EMIs) on a car or commercial vehicle loan can put a borrower under financial pressure. But a loan default does not give a lender a free hand to repossess the vehicle. The Supreme Court has now directed the Reserve Bank of India (RBI) to ensure that banks and non-banking financial companies (NBFCs) follow its rules when repossessing financed vehicles.
The order came in a case involving a truck owner whose vehicle was seized after he defaulted on his loan. The court also ordered the finance company to close the loan account, refund Rs 4.50 lakh received from the truck’s sale along with an annual rate of interest of six per cent and a compensation of Rs 10 lakh.
Why The Supreme Court Intervened
The case involved a Tata SFC 407 truck financed by Cholamandalam Investment and Finance. The borrower had taken a commercial vehicle loan of Rs 10.40 lakh, with Rs 9.36 lakh disbursed initially. He later received another supplementary loan of Rs 1.04 lakh.
However, the truck was repossessed in April 2023 after the borrower defaulted on the repayments. He also claimed that no notice was given before the vehicle was taken away. The finance company later informed him that the truck had been sold for Rs 4.50 lakh. It also claimed that Rs 5.71 lakh was still outstanding on the loan.
The apex court found that the repossession clause gave the financier undue powers, which was not in line with RBI’s guidelines and the Indian Contract Act, 1872. Finally, it set aside the Allahabad High Court’s order and awarded the borrower Rs 50,000 towards litigation costs.
When Can A Lender Repossess Your Vehicle
A lender can have a contractual right to repossess a vehicle when a borrower defaults on the loan. The Supreme Court, however, made it clear that this does not allow lenders or recovery agents to use force, stealth, or arbitrary methods to repossess financed vehicles upon an EMI default.
A Bench of Justices PS Narasimha and Alok Aradhe also looked at the RBI’s rules for banks and NBFCs. These rules bar recovery agents from threatening, intimidating or harassing borrowers. They also prohibit the use of muscle power to take possession of the vehicles. The court also directed RBI to take effective steps to ensure that lenders follow these rules.
What Should Borrowers Check In Their Loan Agreement
A vehicle loan agreement can include a repossession clause. But the terms must comply with the law and applicable RBI rules.
RBI’s guidelines require such agreements to clearly cover the notice period before repossession, the manner in which possession can be taken, and an opportunity for the borrower to repay the dues before the vehicle is sold.
The agreement should also spell out how the vehicle will be sold or auctioned and how the proceeds will be adjusted against the outstanding loan. For borrowers facing repayment difficulties, these clauses can be important.
