RBI panel suggests penalty for home loan providers on loss of borrowers' documents

Lenders need to keep the original home loan documents safe

The BP Kanungo committee, established by the Reserve Bank of India (RBI), has proposed that banks and lenders who provide home loans should compensate borrowers and pay a monetary fine if they lose the borrowers' property documents. Typically, banks and lenders request original property documents and retain possession of them until the loans are fully repaid.

These recommendations were included in a committee report released on June 5th, which outlined various suggestions for enhancing customer service standards in regulated entities. In May 2022, the RBI formed a six-member committee, chaired by BP Kanungo, with the objective of examining and reviewing customer services in regulated entities to safeguard customer interests.

Original property documents play a crucial role in establishing ownership, preventing disputes, facilitating future transactions, complying with legal requirements, and accessing property-related information. Ownership documents, such as the title deed, serve as irrefutable proof and legal validation of one's property ownership. Holding these documents in their original form also reduces the risk of potential disputes or fraud in the future.

Adhil Shetty, CEO of BankBazaar.com, explains, "If you need to sell the property, transfer ownership, or utilize it as collateral for another loan, having the original documents is necessary to expedite the process." He further emphasizes that the loss of property documents can be a significant problem.

The committee has proposed guidelines for handling property documents while closure of the loan accounts after several instances were brought to the notice of the committee where the regulated entities (lenders) had misplaced the property documents taken by them as security for a loan and failed to return the documents / return them promptly when the loan was fully repaid by the borrower.

The committee further suggests regulated entities may be required to pay a penalty/compensation for delay in returning documents. “Further proposes assisting customers in obtaining certified copies and providing adequate compensation in cases of lost documents,” says Ankit Rajgarhia, Principal Associate, Karanjawala & Company, Advocates.

The RBI has invited comments from stakeholders by July 7 on recommendations given by the committee to address this issue by the regulated entities.

Also read: RBI committee proposes new rules to improve customer service standards| Here are key recommendations 

Lenders need to keep the original documents safe

The committee has observed that the banks follow different practices with regard to safe-keep of property documents accepted by them as security. While some keep them at branch, others keep them with controlling offices, yet others at head office. Failure to return the documents in time causes avoidable hardship to the borrower and can even lead to pecuniary loss.

The committee recommends keeping the security documents by the regulated entities in the digi-lockers as this will facilitate easy retrieval in case the physical documents are misplaced.

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Provide a time limit to return the documents

The Reserve Bank may consider stipulating a time limit for the regulated entities to return the property documents to the borrower from the date of closure of the loan account, failing which a penalty / compensation linked to the extent of delay should automatically be paid by the regulated entity to the borrower.

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Where’s the compensation?

The lender has a responsibility to maintain the property documents submitted to avail a loan. In case the lender fails to do so, it might be mandated, as per the recommendations given in the report, to provide the borrower with a viable alternative.

"This is very relevant because if the property documents are lost or misplaced, it may be very difficult, if not downright impossible, for the average person to obtain duplicates by themselves," says Shetty. He adds that the legal processes are complicated by the fact that the documents were lost or misplaced by a different entity altogether.

When this recommendation is implied by the RBI, customers can rest assured that not only are their documents safe with the lender, but the lender will also provide them with certified duplicates in case the originals go missing for whatever reasons. "This has been a long-standing concern of borrowers, and this change will go a long way in reassuring borrowers regarding the safety of their property documents," says Shetty.