The Supreme Court has called on the Reserve Bank of India (RBI) and other stakeholders to establish a standardised framework for preparing title clearance reports before the sanctioning of loans, highlighting that risks posed by inadequate or poorly prepared reports endanger public funds and undermine trust in the banking and financial systems.
A title clearance report is a legal document that verifies the ownership and history of a property. It ensures that the property has no encumbrances, disputes or claims against it, offering confidence to buyers, lenders or banks involved in the transaction. Banks rely on these reports on the properties that are mortgaged by individuals and entities for securing loans.
“We deem it necessary to observe that banks should remain very careful with inadequate title clearance reports, more particularly, when such reports are obtained cheaply and at times for external reasons. This concerns the protection of public money and is in the larger public interest,” held the bench, comprising justices JB Pardiwala R Mahadevan, in a recent judgment.
The court further called for accountability within the banking sector, suggesting that the liability, including potential criminal action, of bank officers who approve loans based on defective title search reports must be determined.
“It is essential for the Reserve Bank of India and other stakeholders to collaborate in developing a standardised and practical approach for preparing title search report before sanctioning loans and also for the purpose of determining liability (including potential criminal action) of the officer who approves loan,” stated the January 9 judgment.
The bench also recommended standardising the fees and costs associated with title searches to ensure the reports are comprehensive and of high quality. “There should be standard guidelines for fees and costs associated with title search reports so as to ensure that they maintain high quality,” it held.
Currently, no uniform mechanism governs the preparation of title search reports. Banks typically rely on reports prepared by empaneled lawyers or chartered accountants, but the lack of standardised guidelines leaves room for inconsistencies and errors.
The need for reform was highlighted by the Supreme Court in a case where a bank approved a loan secured by a mortgaged property that later turned out to have unresolved title disputes.
The bench stressed that a robust title search process could have verified ownership, ensured there were no adverse claims, and confirmed the property’s clear legal status. Such diligence would have mitigated the risk of fraudulent transactions and protected public money, it noted.