Safety of property papers: RBI rule for banks is a relief for borrowers

Madhusudhanan approached the banking ombudsman for relief as the bank failed to resolve the issue. The ombudsman directed the bank to issue a duplicate copy of the lost documents, publish a public notice regarding the loss, and pay Madhusudhanan ₹25,000 due to a deficiency in service. Not content with the relief, Madhusudhanan then approached the National Consumer Disputes Redressal Commission (NCDRC), alleging gross negligence on the part of the bank, and claimed a compensation of ₹5 crore for the loss and mental agony caused to him. The bank tried to blame the courier company for the loss of documents but the NCDRC did not accept the argument. It awarded a compensation of ₹25 lakh to Madhusudhanan, along with ₹50,000 for the litigation costs incurred by him.

Madhusudhanan’s is not a one-off case. Of late there have been a number of complaints about banks losing documents of title deeds of borrowers. At this juncture, a recent notification by the Reserve Bank of India (RBI) promises to help borrowers in getting back the property documents in time once the loan is cleared. Or at least in getting a suitable compensation for each day of delay.

Predicament of borrowers

Whenever any property is taken as primary security or as collateral, a charge by of mortgage is created in favour of the bank by the owner of the property. When original title deeds of properties are available, the mortgage is created by depositing the title deeds to the bank. This is generally described as an Equitable Mortgage. When original title deeds are not available, a registered mortgage is created. There are some basic conditions for creation of equitable mortgage like the handing over of documents must take place at a notified place (like taluk headquarters), there should be intent to create a mortgage and there should be some liability for which this is done.

Ideally, once the loan is cleared, the title deeds should be returned to the borrower (owner of the property). But when the loans are taken for a longer term like 10 or 20 years or even more, due to poor management of documents on the part of some bank officials, the documents are misplaced, creating a huge problem for the borrower.

Selling a property without the original title deed is a difficult task. Even though there are procedures to get duplicate documents and to advertise in newspapers regarding the loss of the original documents, buyers are often wary about such deals. It is a fact that the title to the property based on the recreated or duplicate papers would be weak in comparison with the original papers, which would affect the property’s value if the owner wants to place it on the real estate market or use it as security.

How are property documents lost?

The new generation private banks have a centralised system to preserve documents at all India level or at some regional level. Hence once the mortgage is created by handing over the documents to the bank branch, the branch sends it to the central depository. Chances are there that it may be lost in transit. Same thing may happen when it is sent back to the bank branch for return to the borrowers. Many government banks still maintain these documents only at branch level.

Borrowers must understand that the banks have a right of ‘general lien’. This means that the banks can retain the security documents, even after clearance of any particular loan, if any other liability persists with the bank.

How will the RBI directive help borrowers?

In terms of the guidelines on Fair Practices Code issued to various Regulated Entities since 2003, the banks are required to release all movable/ immovable property documents upon receiving full repayment and closure of loan accounts.

Now the RBI has directed that the banks shall release all the original movable/immovable property documents and remove charges registered with any registry within a period of 30 days after full repayment/settlement of the loan account.

Further, the borrower shall be given the option of collecting the original movable/immovable property documents either from the banking outlet/branch where the loan account was serviced or any other office of the bank where the documents are available, as per her/his preference.

The timeline and place of return of original movable/immovable property documents will be mentioned in the loan-sanction letters issued.

In order to address the contingent event of demise of the sole borrower or joint borrowers, the banks shall have a well laid out procedure for return of original movable/immovable property documents to the legal heirs.

Compensation conditions

In case of delay in the release of original movable/immovable property documents or failure to file charge satisfaction form with the relevant registry beyond 30 days after full repayment/ settlement of the loan, the bank shall communicate to the borrower the reasons for such delay. In the case where the delay is attributable to the bank, it shall compensate the borrower at the rate of ₹5,000 for each day of delay.

In case of loss/damage to original movable/ immovable property documents, either in part or in full, the banks shall assist the borrower in obtaining duplicate/certified copies of the movable/ immovable property documents and shall bear the associated costs.

It should be understood that the compensation as suggested by RBI does not bar the borrower to get any other compensation as per any applicable law. Hence it will be open for the aggrieved customer to approach consumer court etc. for suitable compensation.

One expects that the banks will be more careful in dealing with property documents of customers.

(The writer is a retired banker. The views expressed here are his own, and do not constitute investment advice.)