RBI draft guidelines make repossession of vehicles easier for banks

Couple of years ago, Prakash Kaur had moved the Supreme Court against a leading bank as bank had taken away his car on the grounds he was not repaying the loan. Bank argued that it took the vehicle in its custody because Kaur was not repaying the loan he had taken to buy the car.

The apex court gave judgment in favor of Kaur and many other such borrowers, but the judgment created a dilemma amongst the banks exactly when a bank can take away a borrower's vehicle.

Bankers reported that misinterpretations of the Supreme Court order bought repossessions (banking jargon for takeover of a vehicle or asset for which a person has taken a loan and is repaying it) to a halt as the judgment was "heavily biased in favor of the defaulting borrower."

Bankers stated after the regulatory clarification situation has improved and may give a boost to the auto lending activity.

On April 24, 2009 the Reserve Bank of India issued draft guidelines in which the NBFCs has been asked to include clauses in the loan document on the process and the conditions under which their vehicle can be repossessed in case of default.

Mahesh Thakkar, general secretary, Finance Industry Development Council (FIDC), pointed out the RBI guidelines has given a clear distinction between recovery agents and repossession agents, which the industry was looking for.

Thus the recovery agent is behind the defaulter, while the repossession agent is behind the underlying security, i.e. vehicle. He said, "We are repossession agents, often mistaken to be recovery agents and this created a problem for us in the last 3-4 years".

Govind Sankaranarayanan, chief financial officer, Tata Capital, pointed out, "The draft guidelines attempt to formalize the means with which repossession of secured asset can be done. We have always been having a clear clause in the loan document on the procedure for repossession."

When asked whether the RBI notification will provide a fillip to auto lending, Sankaranarayanan replied, "Now that there are formal guidelines from RBI, it will provide some degree of comfort to lend. It is a step in the right direction."

On the other hand the Indian Banks' Association (IBA) is in a process of issuing a clarification on the issue. When asked in case the IBA clarification is issued will there be increase in lending activity, the head of loans at a leading bank replied, "It should, because the financials will become easy on credit."

"We finance both old and new vehicles and the margins are very high in old-vehicle financing. With the code of conduct in place, even marginal cases will get clearance from the credit departments. This will definitely boost auto financing, especially for commercial vehicles."

Ramesh Ayer, managing director, Mahindra Finance, explained the confusion over how, when and who can repossess will now get removed. He said, "With the RBI guidelines, legally enforcing the document becomes easy. Also, when matters are taken to the court, the case will become stronger for us as all the clauses will now be clearly mentioned in the contract".