Repossession of collateral isn't closure

Ensure you get a no-dues certificate. Better still, sell the collateral and repay the lending institution

Imagine Deepal Thakkar’s (name changed) surprise when he received an order from the Debt Recovery Tribunal for a payment of Rs 18 lakh. The recovery order was for the Honda Civic he had purchased with a loan of Rs 11 lakh in 2009. However, since he was unable to repay the bank, the vehicle had been repossessed by them. After the repossession, Thakkar thought the loan had been repaid.

While Thakkar has filed a case in the Appellate Tribunal on the advice of the Credit Consumer Association, experts say it was his fault because he assumed the loan had been closed after repossession. Says Vinod Chand, honorary general secretary of the association: “In case there is no communication from the bank, borrowers assume wrongly the loan is closed. But they should ensure they get the closure letter.”

The onus is always on the borrower to repay a loan. When the borrower fails to do so for a certain period, usually three to six months, the bank can repossess the vehicle or residence. In such cases, the bank will try to sell the vehicle at the earliest possible date and tries to recover the loan amount along with some interest — usually referred to as the base price in bank advertisements.

There could be circumstances, especially in case of a repossessed vehicle, that the bank does not receive bids on the base price. Says Jairam Sridharan, president, consumer lending, Axis Bank: “Since a car is a depreciating vehicle the sale of the vehicle may not fetch enough money to clear the loan outstanding completely.”

In such circumstances, the bank will follow up for some time with the borrower but may give up if the customer fails to respond. It is possible that after a while the bank writes off the loan from the point-of-view of a profit and loss reporting.

However, this does not mean the customer does not owe the bank the money. If at a later stage the customer is trying to take a loan from another bank, this record will show up in credit bureau data as a loan due.

“Remember, the bank will not give a final settlement notice or a no objection certificate until the amount is paid,” Sridharan says.

Sometimes, in its urgency to recover, the bank might sell it at a lower rate. “While selling the vehicle, the bank should follow practices like an open auction, to ensure that the customer gets a fair deal. But if a repossessed vehicle fetches a lower amount, the bank needs to come to the borrower for the remaining amount,” says Mohan Jayaraman, managing director, Experian Credit Information Company.

It may also happen that the bank serves the customer a notice but the latter refuses to accept it. But it will be considered as proper service.

So, it is advisable to accept the notice and then dispute its correctness or contest the case, says Jehangir Gai, consumer activist.

However, the best way to deal with this situation is by taking it out of the bank’s hands completely. When the borrower realises he would be unable to repay the loan, he should sell the car or house himself and repay the bank. If the sale amount falls short of the due, you could renegotiate with the bank for repayment in instalments.