NBFCs must detail vehicle repossession norms in loan pacts: RBI

The Reserve Bank of India today asked non-banking finance companies (NBFCs) to insert certain clauses in all loan agreements for repossession of vehicles.

In a circular issued this evening, the regulator said contracts between borrower and NBFC must explicitly provide for a notice period before repossession of vehicles. And, circumstances under which the notice period can be waived have to be spelt out.

As part of the fair practices code on loan recovery, put in place in September 2006, RBI’s clarification mandates that loan agreements would have to also detail the procedure for taking possession of the security.

In addition, it says the agreement must give the borrower a final chance to repay the dues before an asset is auctioned, along with the process for giving repossession to the borrower. The procedure for sale of property also needs to be spelt clearly, RBI said.

Repossession of vehicles by auto financiers has been an issue for a long while, with RBI cracking down on lenders who use strong-arm tactics to repossess assets. Following this, banks and NBFCs have complained of an increase in delinquency.

Higher delinquency levels was cited as one reason for lenders to go slow on sanctioning new auto loans.