In a significant ruling, the Supreme Court has directed the Reserve Bank of India (RBI), banks, and other financial institutions to establish a standardized system for preparing title search reports of properties before approving loans. The apex court emphasized that the RBI must also hold bank officials accountable, including potential criminal liability, for approving loans without proper verification.
Importance of Title Search Reports
A title search report is a crucial legal document that traces the ownership history of a property. It is mandatory for banks and financial institutions to verify ownership claims before approving loans secured by mortgaged properties. However, the court noted that many loans are disbursed based on defective titles or invalid ownership claims, often leading to legal disputes.
“We deem it necessary to observe that banks should remain very careful with inadequate title clearance reports, especially when such reports are obtained cheaply or for external reasons. This concerns the protection of public money and is in the larger public interest,” a bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan stated.
Need for Standard Guidelines
The court urged the RBI and financial institutions to collaborate on creating standardized guidelines for preparing title search reports. These guidelines should ensure high-quality reports and include provisions for setting fees and costs. Additionally, the liability of bank officials approving loans without proper scrutiny should be clearly defined, with criminal action as a potential consequence.
Case Background
The ruling came in response to an appeal filed by the Central Bank of India against a Madhya Pradesh High Court judgment. The case involved a woman, Prabha Jain, who challenged the bank’s decision to seize a property she claimed as her own. The property was allegedly sold illegally by a relative to another individual.
A trial court had dismissed Jain’s plea, stating that only the Debt Recovery Tribunal (DRT) had jurisdiction under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. However, the Madhya Pradesh High Court upheld Jain’s plea, ruling that disputes over property ownership fall under civil court jurisdiction, not the DRT.
Supreme Court’s Interpretation
The Supreme Court upheld the High Court’s decision, clarifying that the SARFAESI Act allows banks to recover mortgaged properties through the DRT and under the Civil Procedure Code (CPC). The apex court found no legal error in the High Court’s judgment, emphasizing that ownership disputes must be addressed separately from debt recovery proceedings.
This landmark ruling underscores the need for stringent verification processes to protect public money and prevent disputes arising from flawed property titles.
