Here's how your bank could goof-up your car loan closing process

Last year, FirstBiz did a series on how Indian banks goof-up and customers have to run around to rectify the wrongs that the banks have done.

Based on its popularity and reader requests, Firstbiz has decided to continue the series and focus upon areas where banks make the most blunders, which in short is everywhere-from deposit accounts to cards to loans.

In this series, we will also tell you what you can do if you are faced with a similar situation, and importantly, how to avoid such situations. In the first instalment of our series, we focus on car loans.

Most of us usually take a home loan, a car loan, a personal loan, and also carry some debt on the credit card. When it comes to loans, it must be understood that paying the last Equated Monthly Installment (EMI) does not equal to closing the loan. There are a few steps an individual needs to take to tie up the loose ends, to ensure that the loan amount is fully closed. This is especially true in the case of a car loan.

A case study
Did you know that your bank can actually goof-up with the loan closing process and cause you some major headaches?
This is a true story. It was mentioned in the Reserve Bank of India’s annual report 2012-13. An individual, let’s call him Mr X , had taken a car loan from a bank for Rs 5.12 lakh. He issued standing instructions to the bank to deduct the EMI of Rs 10,760 from his savings bank account. But the bank was irregular in deducting the amount from Mr X’s account. Finally, he paid up the entire outstanding amount to the bank. And now comes the important point we are driving at: The bank issued a “No Dues” certificate to him, but did not cancel the hypothecation status. Investopedia defines hypothecation as anestablished practice of a borrower pledging an asset as collateral for a loan, while retaining ownership of the assets and enjoying the benefits therefrom. With hypothecation, the lender has the right to seize the asset if the borrower cannot service the loan as stipulated by the terms in the loan agreement.

The owner of a car, who has taken a car loan from a bank, can sell the vehicle only when the bank removes the hypothecation status. In the case of Mr X, the bank ignored his request to cancel the hypothecation status. Hence, Mr X was not only unable to sell his car, but the delay of a year; yes, you read that right, year’s delay meant depreciation of the the value of the car, an irreparable financial loss.

Mr X finally approached the apex bank’s ombudsman’s office and registered a complaint. The ombudsman later found that the bank had not only failed to cancel the hypothecation, but also pointed out that the customer had not cleared a few dues to the bank. The bank, however, failed to support these charges with valid documents. The ombudsman found that the loan borrower had actually paid all his dues. Even after the ombudsman gave ample time to the bank to substantiate the claims, the latter failed to prove their charges.

Finally, the ombudsman inferred that the bank had failed to service the customer and hence was liable to compensate the borrower to the tune of Rs 10,000 as well as issue him a No Objection Certificate.

The learnings

This case reveals that not much can be done by a customer in the case of any kind of bank loan.

Hence, we advise any borrower approaching a bank for a loan to:

• Ensure that you keep a track of the payments even via ECS
• Register yourself for SMS alerts from the bank and importantly, read the alerts. Banks send you SMS every time there’s an activity on your account
• Approach the bank’s ombudsman sooner (usually after one month from the date of your first complaint to the bank) and not wait for a year. In this case, the borrower lost an opportunity to sell his car in time and hence suffered financial loss due to depreciation.