The Hindu Business Line : Banks asked to follow legal procedures for taking possession of hypothecated goods

Mumbai, April 24 Banks will have to follow legal procedures while taking possession of goods or property hypothecated to them against loans. The Reserve Bank of India has told banks that the recovery agents appointed by them cannot re-possess by resorting to illegal means, vehicles or property or any other goods, in case of defaults by borrowers.

In the final guidelines on appointment of recovery agents issued on Thursday, RBI said banks can follow the procedure defined under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act and the Security Interest (Enforcement) Rules 2002, for repossession of goods: “It is desirable that banks rely only on legal remedies available under the relevant statutes while enforcing security interest without intervention of the Courts”.

Where banks have incorporated a re-possession clause in the contract with the borrower and rely on such re-possession clause for enforcing their rights, they should ensure that the re-possession clause is legally valid, complies with the provisions of the Indian Contract Act in letter and spirit, and ensure that such a clause is clearly brought to the notice of the borrower at the time of execution of the contract.

The terms and conditions of the contract should be strictly in terms of the bank’s recovery policy and should contain provisions regarding notice period before taking possession; circumstances under which the notice period can be waived; procedure for taking possession of the security; a provision regarding final chance to be given to the borrower for repayment of loan before the sale/auction of property; procedure for giving repossession to the borrower and procedure for sale/auction of the property, the guidelines said.

RBI said violation of the above guidelines and adoption of abusive practices followed by banks’ recovery agents would be viewed seriously.

Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a particular area, either jurisdictional or functional, for a limited period. In case of persistent breach of above guidelines, RBI may consider extending the period or the area of ban. Similar supervisory action could be attracted when the high courts or the Supreme Court pass strictures or impose penalties against any bank or its directors/officers/ agents with regard to policy, practice and procedure related to the recovery process.

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