On Wednesday, the Supreme Court ruled that banks and finance companies are prohibited from using aggressive methods to recover loans. The court stated that defaulting on a loan does not give lenders the right to forcibly seize a borrower’s assets, even if the loan agreement includes provisions for repossession. This decision underscores the need for fair treatment of borrowers in financial agreements.
Sharma approached the Allahabad High Court, which dismissed his plea, saying he had approached it belatedly since the vehicle had already been sold. It also noted the default in payment of the loan instalments and dismissed the writ petition. He also argued that a financier could not exercise its right to self-help repossession through force or deceit, or contrary to the terms of the agreement.
The observations were made by Justice Alok Aradhe, who was hearing an appeal filed by Hari Dutta Sharma challenging an April 2025 order of the Allahabad High Court.
The court directed the Reserve Bank of India (RBI) to ensure “genuine compliance” with its guidelines, master circulars and clarifications by non-banking financial companies (NBFCs) and scheduled commercial banks so that borrowers are not dispossessed of their livelihoods “in the dead of night, without notice and without recourse”. “Where a financier steps outside that framework, breaks open a lock in the dead of night, takes possession without notice and without a signed memorandum, and thereafter treats the borrower merely as a source of residual liability, it forfeits the protection that the contract and the law would otherwise have afforded it,” the court said. The Supreme Court, however, said that while a repossession clause in a loan agreement was meant to protect the interests of the lending company and make it more feasible for it to extend credit to borrowers, such a right does not operate without limits.
He had argued before the Supreme Court that the company had repossessed his vehicle in violation of the loan agreement, which required seven days’ prior notice.
“Precisely because this right operates as an alternative to recovery through courts or tribunals, outside the supervision of a court at the first instance, it must be construed with great circumspection,” the court said. “Left unchecked, it is capable of being read as an unbridled licence to seize property by stealth, by force or in the dead of night, converting a facility meant to promote financial inclusion into an instrument of oppression against the very class it was designed to serve,” it said.
