Banks Refusal to Return Mortgage Documents Except to the Deceased

Recently, the High Court of Karnataka imposed a cost of Rs 2 lakh on Canara Bank, a public sector bank that insisted on returning documents of a mortgaged property only to the original borrower, even though he had passed away. The bank was aware of this. They had accepted a one-time settlement of the borrower’s loan from his father. Yet refused to return the documents to the father, who brought the case to court. 

In this Weekly, let us understand what are the RBI rules about the one-time settlement scheme, returning of documents and what happened in the current case? 

One-Time Settlement (OTS) Scheme:

The OTS Scheme is a contract between a bank and a borrower to settle a loan that they are unable to repay at a reduced price. Banks use this scheme to reduce their non-performing loans (NPLs). These are loans where the borrowers have failed to make regular payments. The settlement amount is less than the original debt. The borrower can repay within 3 months to a year depending on the size of the loan. The scheme covers all sectors in India including MSMEs and SMEs. While all banks are eligible to offer the scheme, they have to use discretion while deciding whether or not to offer it. This is to prevent  a wilful defaulter from exploiting the scheme. 

Returning Documents under RBI Rules

On September 13, 2023, RBI issued a directive to all banks asking them to release all original movable and immovable property documents (Title Deeds, Insurance Policies, Shares, Securities, National Savings Certificate etc.) and remove any charges registered with any registry within 30 days of full repayment or settlement of a loan amount. A charge is an interest created on the property of a company as a security for repayment of the loan.

If there is a delay in returning the documents, the bank has to pay Rs 5000 per day of delay as compensation to the borrower. 

In case of death of the original borrower, the bank must have a well laid out procedure of return of documents to the legal heirs. They also have to make this procedure available on their website for customers. 

In case of complete or partial loss or damage to the documents, the banks have to assist the borrower in getting duplicate or certified copies of the documents and will bear the cost of the same. In these cases, they will be given a total period of 60 days and compensation will only be calculated after that. 

What happened in the current case?

The original borrower died by suicide and the bank was aware of this. His father, the petitioner in the current case, offered to repay his son’s loan. The bank agreed and offered a one-time settlement (OTS) scheme to him. He was asked to pay Rs 19.75 crore within 90 days. The petitioner was only able to repay Rs 9.35 crore by February 2023 and asked for an extension to repay the remaining amount in March 2023. Instead of giving him an extension, the bank initiated steps to take possession of the mortgaged property. The petitioner filed a case and the court granted him 3 more months to repay the remaining amount. He repaid the entire amount and also offered to pay an interest and legal expenses for the delayed period. 

After accepting the entire amount, the bank started dodging his request to return the mortgaged property’s documents. The bank’s counsel said that the documents could only be returned to the “original owner.” 

Justice M. Nagaprasanna, criticizing the bank’s actions, said that knowing fully well that the original borrower is no more, their actions are beyond comprehension, rather strange and preposterous. The court directed the bank to return the documents to the father, along with Rs 2 lakh as cost.