Sunday, April 25, 2004

The fine print of loans
Pushpa Girimaji

WHENEVER you take a loan, read the terms and conditions carefully and thoroughly. If you disagree with any of them or have questions about them, put it down in writing. Remember, the failure to read a loan document could well land you in trouble.

Take the case of Chandrika Rai, who availed of a loan worth Rs 75,000 from a bank to buy a tractor. The first year, the bank paid the insurance premium, got the insurance cover and debited the amount from the borrower’s account. However, it did not renew the policy the next year. In the meantime, the tractor met with an accident and the insurance company repudiated the claim on the ground that the policy had lapsed.

Holding the bank responsible for its failure to renew the policy, Rai sought a compensation of Rs 1 lakh from the bank. The District Consumer Disputes Redressal Forum in Azamgarh, Uttar Pradesh, held the bank guilty of negligence and directed it to pay the consumer the amount along with 12 per cent interest.

However, the bank, in its revision petition before the National Consumer Disputes Redressal Commission, argued that the payment of the first premium in no way fixed the responsibility for renewal on the bank.

It also pointed to the hypothecation agreement, signed between the bank and the borrower, which put the responsibility for taking the policy and renewing it, entirely on the consumer. On the basis of this, the apex consumer court held that there was no negligence on the part of the bank, thus setting aside the order of the lower consumer courts.

I must mention here two earlier cases decided by the National Commission, wherein it had held the banks liable for the loss suffered by the consumer on account of their failure to renew a policy. However, in those cases, there was clear evidence of the banks having undertaken the task of renewing the policy and there was no mention of any agreement to the contrary. In the case of United India Insurance vs Shatrughan Sharma, decided in 1998, for example, the consumer had even deposited the insurance amount in his account two days prior to the expiry of the policy. But the bank, which had kept the insurance papers, had not renewed the policy. In the case of Pradeep Kumar Jain vs Citibank, decided in May, 1995, the bank had collected from the consumer two undated cheques for renewing the policy, but had failed to do so. In both the cases, the National Commission had, therefore, directed the banks to compensate the consumer for the loss suffered.

In the case of Pradeep Kumar Jain, however, the consumer had also sought additional compensation towards third party claim and had gone to the Supreme Court on this issue. While rejecting the claim, the Supreme Court, pointed out that Section 146 of the Motor Vehicles Act made it obligatory on the part of the owner of a vehicle to take an insurance policy covering third party risk. In view of this, the consumer or the owner of the vehicle should have shown some anxiety in ensuring that such a policy existed or the insurance policy was duly renewed by the bank, as promised.

So, if a bank that finances your vehicle insists on keeping your insurance papers and renewing it, ask it to say so in writing and also give an undertaking that it would be liable for all the consequences of their failure to renew the policy.

And ask in writing for a copy of the renewed policy too. However, it would be far wiser to renew the policy yourself and keep the insurance papers with yourself too.