RBI Recovery Guidelines 'Exist Only On Paper': Supreme Court Directs Effective Compliance By Banks, NBFCs

The Supreme court on Wednesday directed the Reserve Bank of India (RBI) to take effective steps to ensure that NBFCs and Scheduled Commercial Banks actually comply with its recovery guidelines, observing that the Guidelines, Master Circulars and Clarifications issued over the years have “existed only on paper”.

The direction came while allowing an appeal by Hari Dutta Sharma, whose commercial vehicle was repossessed by Cholamandalam Investment and Finance Company Limited after loan defaults.

The bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe held that a financier's contractual right to repossess a vehicle must be exercised within the safeguards prescribed by the agreement and RBI Guidelines.

“We, therefore, direct the RBI to take effective steps to secure genuine compliance, by NBFCs and Scheduled Commercial Banks alike, with the Guidelines/Master Circulars/Clarifications, it has issued from time to time, so that incidents of the present kind, where a citizen is dispossessed of his livelihood in the dead of night, without notice and without recourse, do not recur,” the bench directed,

Sharma obtained a commercial vehicle loan from Cholamandalam on March 25, 2019, to purchase a Tata SFC 407 truck. The loan was secured by hypothecation of the vehicle and was repayable in monthly instalments.

A supplementary loan was also extended in June 2021.

After Sharma defaulted on the instalments, the company issued a recall-cum-demand notice in January 2022. It later repossessed the vehicle and issued a pre-sale letter on June 13, 2022. Sharma paid ₹86,726 and assured the company that he would regularise the loan, following which the vehicle was released.

Sharma again defaulted. Notices issued in July and December 2022 gave him an opportunity to clear the outstanding dues or surrender the vehicle. The company also informed him that a surrendered vehicle would be sold and the proceeds adjusted against the loan dues.

According to Sharma, four unidentified persons broke the truck's steering lock at around 1 a.m. on April 9, 2023, while it was parked at a consignor's godown in Ayodhya, and drove it away. He lodged a lost article report and an e-FIR the same day.

The company later informed Sharma that it had taken possession of the vehicle and sold it on August 31, 2023. In a notice dated September 30, 2023, it stated that ₹5,71,914 was payable as on the date of sale and that the vehicle had fetched ₹4.50 lakh.

Sharma approached the magistrate and later the Allahabad High Court. The High Court dismissed his writ petition, noting that the vehicle had already been sold and that he had approached the court belatedly. It also recorded his defaults on the loan instalments.

Before the Supreme court, Sharma argued that the repossession violated Article 11 of the loan agreement. He contended that the agreement required seven days' prior notice and that the financier could not exercise its right of self-help repossession through force, deceit or in breach of the agreement.

The company, on the other hand, described Sharma as a chronic defaulter. It maintained that pre-seizure intimation, an inventory list, post-seizure intimation, and a pre-sale notice had been furnished. It also contended that the vehicle was sold for ₹4.50 lakh in accordance with the loan agreement.

The Supreme court held that a financier's right to take possession of a financed vehicle is essentially contractual when the loan agreement provides for it. But that right is not an unrestricted licence to seize the vehicle by force, stealth or in the dead of night.

The court examined RBI's Fair Practices Code for Lenders and subsequent Guidelines, Master Circulars and Clarifications dealing with loan recovery. These rules bar lenders from harassing borrowers at odd hours or using muscle power for recovery. They also require vehicle seizures to be carried out through lawful means.

The RBI framework also requires repossession clauses in loan agreements to be legally valid and consistent with the Indian Contract Act, 1872. Such clauses may provide for a notice period, the circumstances in which notice can be waived, the procedure for taking possession and the process for sale or auction.

Article 11 of Sharma's loan agreement provided for a seven-day notice in case of default before repossession. But the same clause allowed the company to waive that notice at its discretion if it believed that doing so was necessary to protect the vehicle or its interests. It also authorised the company to enter “any place or places” where the vehicle might then be or was likely to be.

The court found that these provisions could not be reconciled with the RBI framework. It noted that the clause declared the borrower's rights over the vehicle to end automatically on default, while also providing for a seven-day notice. The company was given discretion to waive that notice altogether.

“Thus, Article 11 places the borrower entirely at the mercy of financier's unilateral discretion, both as to whether notice will be given at all and as to the manner and timing of the sale,” the bench observed.

It held that Article 11 was neither consistent with the RBI Guidelines nor the Indian Contract Act.

The court further found that the clause did not prescribe a procedure for taking possession or for conducting the sale or auction. It also held that authorising the company to enter “any place or places” in search of the vehicle was contrary to the RBI Guidelines and offended the requirement of a fair, lawful procedure for taking possession.

“A contractual term which permits one party unilaterally to dispense with the procedural safeguards designed to protect the other cannot be regarded as being in conformity with either the RBI Guidelines or the general contractual requirement of fairness,” the bench observed.

On the facts, the Supreme court found that no seven-day notice had been issued to Sharma before the April 2023 repossession. It noted that his specific account that the vehicle was taken at around 1 a.m. after its steering lock was broken remained unrebutted. The possession memorandum also did not bear Sharma's signature.

The court held that the action contravened the RBI Guidelines, which carry statutory force, as well as the terms of Article 11 of the loan agreement. It noted that the manner of taking possession was not peaceful and that the vehicle had been taken without following due process.

The bench also declined to sustain the High Court's finding on delay. Sharma had lodged an FIR on the day of the incident and later filed a complaint under Section 156(3) of the Code of Criminal Procedure on November 8, 2023, believing that his vehicle had been stolen. Traffic challans were also issued against the vehicle on January 18, 2024, November 18, 2024, and February 18, 2025, even though the company claimed to have sold it in August 2023.

“We are unable to sustain the finding that the writ petition was liable to be thrown out on the ground of delay alone, without an examination of its merits and in the absence of any demonstrated prejudice to the Company,” the bench observed.

The court noted that Sharma was a man of modest means who was solely dependent on the vehicle for his livelihood through the business of transportation. It held that he had been deprived of his right to livelihood in an arbitrary and unfair manner, amounting to a violation of Articles 14 and 21 of the Constitution.

The Supreme court quashed the Allahabad High Court's order. It declined to set aside the vehicle sale because the vehicle had already been sold on August 31, 2023.

The company was directed to close both of Sharma's loan accounts and refund the ₹4.50 lakh sale proceeds. The amount will carry 6% annual interest from August 31, 2023, until payment. The company was also directed to pay ₹10 lakh as compensation for mental agony and loss of livelihood, besides ₹50,000 as costs.

The RBI was separately directed to take effective steps to ensure genuine compliance with its recovery-related Guidelines, Master Circulars, and Clarifications by NBFCs and Scheduled Commercial Banks.

The Registry was directed to send a copy of the judgment to the RBI.

For Petitioner: Advocates Gaurav Agarwal, Shristi Gupta and Shashank Singh, AOR

For Respondent: Advocates Aishwarya Mishra, Anuj Chauhan, S.surender, Akansha Singh and Shubham Garg