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Supreme Court bars lenders from forceful loan recovery
The Supreme Court said such a right can be exercised only by following safeguards laid down by law and the Reserve Bank of India.
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The Supreme Court on Wednesday said banks and finance companies cannot use strong-arm tactics to recover loans or treat a loan default as “a licence” to forcibly seize a borrower’s assets, even when the loan agreement gives lenders the right to repossess them.
The court said such a right can be exercised only by following safeguards laid down by law and the Reserve Bank of India (RBI), and directed the RBI to ensure “genuine compliance” with its guidelines, master circulars and clarifications by NBFCs and scheduled commercial banks. This was necessary to ensure borrowers were not dispossessed of their livelihood “in the dead of night, without notice and without recourse”, it said.
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“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 observations were made by Justice Alok Aradhe while hearing an appeal filed by Hari Dutta Sharma against an April 2025 order of the Allahabad High Court.
Sharma had taken a commercial vehicle loan of around ₹10 lakh from a finance company to buy a truck.
After he defaulted on the instalments, the company sent “four unidentified men” to his home at around 1am. They broke the truck’s steering lock and drove it away without giving Sharma any prior notice. The company subsequently took possession of the vehicle and sold it.
