Authored By: Prisha Verma
New Law College, Pune
ABSTRACT
The perspective of Mortgage law in India lies in a narrow but somewhat uncomfortable intersection between borrowers and creditors. The doctrinal basis of mortgages is found in the Transfer of Property Act, 1882, but the impetus for legal developments in mortgages derives from the emerging banking reforms and the resultant legislative enactments (e.g., the SARFAESI Act, 2002 and the Recovery of Debts and Bankruptcy frameworks) that reinforce favoured creditor protection through swift enforcement mechanisms. However, even as the courts address an increasing number of applications probing the fairness of creditor rights exercised through the process of banking or land law enforcement, they are also engaged in examining the breadth of, and ensuring statutory compliance with, procedural safeguards and principles of natural justice. This paper further considers whether the courts in India are also prepared to assist borrowers to not only combat arbitrary bank action, but also to grasp their constitutional property rights and consider a growing body of analysis that equally favours financial stability alongside individual justice. In developing the analysis, this paper is situated within the legislative framework and case law exploring whether India’s mortgage law successfully reconciles the dual objectives of securing credit and protecting borrowers.
Keywords – Mortgage, Borrowers’ Rights, Secured Credit, SARFAESI Act, Judicial Trends, Constitutional Protection
INTRODUCTION
In India, the law of mortgages is at the intersection of property law, contract law and constitutional guarantees. A mortgage, as used in the tradition sense, is the transfer of an interest in immovable property as security for the repayment of a debt. There are several types of mortgages that are recognized by the Transfer of Property Act, 1882, including a simple mortgage, usufructuary mortgage, English mortgage, conditional sale, equitable mortgage and anomalous mortgage. Of these, the equitable mortgage by deposit of title deeds is the most commonly used in banking transactions. For decades, the remedies available to lenders under the TPA were cumbersome and lengthy and often required protracted civil suits in order to foreclose or dispose of the secured mortgage.
In the 1990s, when India’s financial sector was expanding and the problem of non-performing assets grew, Parliament passed a number of laws aimed at expediting debt recovery. The Recovery of Debts and Bankruptcy Act, 1993, established Debt Recovery Tribunals as the forum with exclusive jurisdiction over claims made by banks. The parliament passed the SARFAESI Act in 2002, which permitted secured creditors to take possession of secured assets, to manage and sell to realize debts, without prior permission from a court. There is little doubt that these statutes have strengthened banks’ ability to enforce security. The questions that accompany these developments evoke more foundational questions regarding fairness, due process and the protection of borrowers from arbitrary deprivation of property.
The purpose of this article is to critically assess whether the Indian courts have caught a fair balance between the rights of lenders and borrower’s as we see now in the law as ‘mature’. This analysis examines the doctrinal framework, important decisions from the courts, weaknesses in the statute scheme, and the constitutional aspect of mortgage enforcement in the context of enforcement. This article argues that the courts have acted on a few occasions to protect fairness, but overall the framework is creditor-minded and needs reform to ensure that a borrower does not become an anonymous victim of financial enforcement.
JUDICIAL TRENDS: PROTECTION OF BORROWERS VERSUS EMPOWERMENT OF CREDITORS
The landmark Mardia Chemicals Ltd. v. Union of India (2004) judgment by the Supreme Court ventilated a constitutional challenge to mortgage enforcement under SARFAESI. While the Court validated the statute, honouring the public interest in safeguarding the banking sector from borrowers who fail to pay, the Court also struck down the provision requiring borrowers to deposit 75 per cent of the amount owed before challenging bank action. The Court identified that provision as oppressive and a violation of the access to justice principle. The case therefore illustrated the Court’s desire to calibrate the balance: to accept creditor powers in principle and intervene to limit excessive harshness.
Later cases have illuminated the tension between time and fairness. For example, in Transcore v. Union of India (2008), the Court framed its creditors’ rights in a manner that allowed lenders to utilise their options under both SARFAESI and the Recovery of Debts Act. Likewise, in Indian Overseas Bank v. Ashok Saw Mill (2009), the Court held that SARFAESI is a “complete code” and thereby precluded any role for a civil court to intercede in the enforcement of a mortgage. These are examples of how judgments convey a judicial inclination towards an efficiency of banks, even at the expense of narrowing the borrower’s defenses.
However, the judiciary has also served as a source of protection for vulnerable parties, in limited instances. In Harshad Govardhan Sondagar v. International Assets Reconstruction Co. (2014), the Court held that lawful tenants could not be evicted by banks in enforcement proceedings, and therefore acknowledged third-party rights that would otherwise have been extinguished in absence of remedy. In Vishal N. Kalsaria v. Bank of India (2016), the Court took the additional step of holding that protections bestowed under rent control legislation sui generis, outrank the powers of the creditor, under SARFAESI. Here, the courts have displayed a sensitivity to the socio-economic consequences of enforcement of the mortgage on parties vulnerable in the context of housing rights and livelihood.
In general terms, the picture represents an oscillation. In some instances, the Court has underlined the importance of creditor’s rights primarily for the purposes of economic efficiency, whereas it has also blurred questioning norms of public law and constitutional fairness and due process principles to mitigate the substantive impact on borrowers. This fluctuating position highlights the structural tensions at the core of the mortgage law dispatch the tension at the core of India’s mortgage law.
LOOPHOLES AND PROCEDURAL WEAKNESSES
There are still many gaps in the legal framework despite numerous judicial interventions. Borrowers still only have limited challenge grounds within SARFAESI, typically on the basis of procedural rather than substantive defects. While supposed to provide quick justice, Debt Recovery Tribunals are vacant with insufficient infrastructure causing delays, rendering them an ineffective monument of protection.
Even when taking possession, it is typically mechanical in nature. Magistrates when requested by the banks under Section 14 of SARFAESI will grant possession with a matter of course, without affording an adequate scope of inquiry and in turn limiting borrowers access to a level of hearing. Borrowers were regularly dispossessed from property with little to no transparency and at prices that were far below the market value as well as ownership being undervalued.
Such loopholes illustrate that while the law in an abstract manner allows for a formal role for borrower protection, it will often render rights illusory in practical application. Procedural inefficiency and lack of supervision work to create more asymmetry of power between banks and individual borrowers.
THE CONSTITUTIONAL DIMENSION
Even if not a fundamental right, the right to property still enjoys protection under Article 300A of the Constitution, which prohibits deprivation of property save by authority of law. Article 300A must be read in conjunction with Article 21, the right to life, which includes the right to livelihood, so that arbitrary dispossession of property constitutes a sufficient assault on the due process right that is guaranteed under the Constitution. For the purposes of this article, it will not be forgotten that the borrowers facing foreclosures are not simply commercial actors; they are families whose homes or small businesses are, in a real sense, on the line.
The Supreme Court has made it clear in its jurisprudence following Maneka Gandhi v. Union of India (1978) that “procedure established by law” must be just, fair and reasonable. Any enforcement process that allows creditors to dispossess borrowers without adequate independent safeguards is without any doubt unconstitutional. The role of the judiciary is not just to sustain a statutory mechanism, but to comply with constitutional values of fairness, non arbitrariness and access to justice to ensure that a statutory mechanism will be applied consistently in a way that does not deviate from these values.
COMPARATIVE PERSPECTIVES
In jurisdictions such as the United States and United Kingdom, foreclosure sends cases through an exceedingly controlled and reviewed judicial process. Statutory redemption periods, debt restructuring opportunities, and consumer protections typically remain in place to avoid arbitrary eviction. Now, the European Union has directly asked the laws of foreclosure to be enforced with significant borrower safeguards and has even included provisions that recognize housing as a human right under the Mortgage Credit Directive.
Compare this with the Indian system, where creditor recovery takes priority with limited judicial oversight. While this may be the more efficient system, it raises even greater questions about lack of justice in that system. The lack of robust statutory borrower protections puts the onus on the judiciary to enforce justice on a case-by-case basis. In a well-balanced system, India could adopt best practice from around the world while maintaining the confidence of creditors.
SUGGESTIONS
A codified charter of Borrower Rights, which will act as a law and create transparency and equity in lending. This charter should require banks and financial institutions to disclose all the terms, provide reasonable opportunities to represent themselves prior to commencing recovery proceedings, and make clear that predatory or unfair lending models are not to be used. This kind of charter would be a great counterpunch to the creditor-side biased perspective of our existing recovery law.
Simultaneously, we also must have some degree of judicial scrutiny in limited cases. Although SARFAESI and other laws have sought to reduce delays in the judiciary, a limited level of scrutiny should be available when recovery actions may unduly interfere with an individual’s right to shelter or source of income. We want courts to be available to the extent that enforcement does not affect an individual’s fundamental rights, acting only as a stopgap measure where equity demands it.
Moreover, a greater level of coherent legislation could be provided through the merging of parallel legal regimes (i.e. – the Transfer of Property Act, 1882, the SARFAESI Act, the Recovery of Debts and Bankruptcy Act, 1993, and the Insolvency and Bankruptcy Code, 2016). At present, this type of overlap causes confusion, inconsistent remedies, forum shopping, and excessive delay. Aligning terms and provisions would improve efficiency as well as legal certainty for both parties.
A future reform should focus on reinforcing a robust alternative dispute resolution schema as part of the financial recovery infrastructure. By institutionalizing debt restructuring through mediation and conciliation, one could reduce the adversarial nature of proceedings in favor of collaborative resolutions. This would be particularly beneficial for smaller borrowers, for whom litigation is very expensive and intimidating.
Finally, the law should always ensure a balance between financial inclusion and recovery. An emphasis on cost-effective policies to ensure access to affordable credit and prevent exploitative loan terms would help to prevent defaults at the outset and reduce reliance on strenuous recovery processes. This would ensure the credit system operates efficiently and responsibly in a way that yields economic growth without devaluing the dignity and survival of borrowers.
CONCLUSION
Indian mortgage law is a constant balancing of economic realities and constitutional goals. On one side, the legislature has chosen to explicitly empower creditors through measures like the SARFAESI Act and the RDB Act, knowing that the rights of financial institutions could be undermined if they don’t provide minimum methods of recovery in a timely manner to provide a credit flow for the economy. On the other side of this balance, the judiciary has constantly informed lenders that procedural expediency must always yield to principles of fairness, natural justice and the rights of borrowers. Important cases like Mardia Chemicals v. Union of India or Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd, highlight this tension: while simultaneously recognizing the rights of creditors, the Courts have established boundaries for protected parties, such as borrowers, tenants and guarantors from arbitrary or disproportionate action. Therefore today, Indian mortgage law has a dual identity: it preserves financial stability but it achieves that outcome within the constitutional constraints of fairness.
REFERENCES
Transfer of Property Act, 1882
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
Recovery of Debts and Bankruptcy Act, 1993
Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311
Transcore v. Union of India, (2008) 1 SCC 125
Indian Overseas Bank v. Ashok Saw Mill, (2009) 8 SCC 366
United Bank of India v. Satyawati Tondon, (2010) 8 SCC 110
Harshad Govardhan Sondagar v. International Assets Reconstruction Co., (2014) 6 SCC 1 Vishal N. Kalsaria v. Bank of India, (2016) 3 SCC 762
Maneka Gandhi v. Union of India, (1978) 1 SCC 248
European Union Mortgage Credit Directive, 2014/17/EU
