[Ragavsr]

Originally Posted by vrprabhu

there is no guarantee that the said 'security' will realise the outstanding dues if there is a default.

So, there is a likelihood of 'erosion' in the value of the security; also, shouldn't they (banks) ensure that the borrower is held liable for recovery of the

1. Have you heard of a concept called risk underwriting ? If you think the vehicle will depreciate, don't give 100% loans and ask for a margin amount .

2. Any business has risk, so does lending money . If the bank doesn't want risk, just go keep the money n Treasury bonds .

3. Reasons like this are why India remains a 'cheap ' country, a place with poor quality of life and poor place to do business and no wonder millions immigrate yearly.

4. This is basically an exploitative mis use of criminalization of cheque bounce. No wonder banks take these unofficially and never such a requirement is part of the loan prospectus .

5. This is no different from exploitative employers holding the employee's certificates or educational institutions holding the students prior certificates or bonded workers in a brick kiln.

[vinu_h]

Process varies with banks. 7-8 years ago, I needed a home loan and due to the circumstances, relented and gave into their blank cheques request, but, promptly blocked them a few minutes later. Thereafter when I moved to another lender recently, the cheque value was for exactly the principal + interest outstanding.

[Axe77]

Originally Posted by Ulysses

The banks asks for blank cheques for all kinds of unsecured loan (where the value of the collateral to be mortgaged is presumably lower than the liability, for example depreciated value of a vehicle) such as auto, consumer finance (higher amount only) and auto loan.

What you just described above for most part is the exact opposite - its a “secured” loan, since it has collateral (or security over a specific asset), whether or not the asset is depreciating in nature or not. The primary way to deal with depreciating loans is to “right size” the debt to the value of the collateral accounting for normal depreciation over a period of time. That’s what a credit / risk team would typically do.

Originally Posted by Ulysses

However, the correct legal procedure is to give "cancelled and signed blank cheque" not bearer blank cheque (absolutely no no, because anyone can steal that and empty the bank account!) or crossed blank cheque.

Anyone can “steal that and empty the bank account”??? While it is theoretically possible, please understand you are dealing with a bank with storage services, not a local pawn shop. If you take a housing loan, by extension you would be concerned that anyone can steal your title documents during the life of the loan. That’s not to say I’m agreeing with issuing a blank cheque per se but that statement is a bit extreme.

Whether correctly or incorrectly, why is the bank asking for a “blank” cheque (or variations of that) - it is as payment security so it can pursue S 138 criminal proceedings in the event an EMI is unpaid or the loan is accelerated. This has a range of mis - practices amongst many banks and institutions but to your point above, a cancelled cheque serves ZERO purpose for any of the above. A cancelled cheque I think is given when you set up an ECS instruction (legally ECS has been given 138 cheque status if an agreed ECS fails) - a cancelled cheque serves no purpose as payment security.

The appropriate course of action (some of which you have mentioned below but jumbled with some misinformation) is to give a cheque which is:
- crossed (i.e. no longer a bearer cheque instrument;
- has the bank as payee mentioned;
- I would add that it should have a maximum amount mentioned which is either the total loan amount or marginally over instead of being completely blank as to the amount.
- [undated]: I believe this should be acceptable. Cheques have a shelf life once dated and since the idea is that the bank should be able to date and present the cheque in an event of default and loan tenures are typically 3 years or even longer, it is practice to receive undated cheques.

As a customer, I would also suggest you take some photos of the cheques or some other record (perhaps email these to yourself) where you can remember 3 - 5 years later which and how many such cheques you had issued as payment security so that you can receive them back once you close the loan and get your no dues certificate. Ideally have the loan documentation also record the specific details of the cheques that you had provided.

Originally Posted by Ulysses

Also the cheque should be in name of bank (never in name of dealer) with the loan account number clearly mentioned. The bank should give an acknowledgment on the photocopy of the cheques along with date and official seal.

Agree. Good point

Originally Posted by Ulysses

The logic behind this is to create a criminal case against the borrower in case of default by means of dishonored cheque. As long as the cheques as crossed, in name of bank and duely cancelled, there is no way anyone can use those cheques other than by bank with a valid case of loan default.

I don’t believe you can present a “cancelled” cheque. Again, I think what you mean is present a crossed cheque which has been drawn in the name of the bank.

On a separate aspect, there has been evolving case law from some high courts that undated cheques used can’t be taken as “security” and if taken as security whether or not S. 138 NIA relief is available to such instruments. For this reason, some banks who’ve kept their documentation updated will write that it is being taken as a “mode of payment” and not mention it as “security”. But that is an entire discussion in itself.

In summary:

There are a range of practices out there, some of them completely overboard and unacceptable as a customer. I would push back to any bank (to the point of not taking the loan from them if needed) if they ask me to give a blank signed cheque with no cap on the amount and which is also unnamed. Of course, I recognise that to some extent your ability to negotiate is down to your credit worthiness and therefore option of multiple lenders but honestly in many cases it just comes down to plain awareness and the ability to push back to the bank.

[neeraj0272]

I recently took a car loan from BoB and gave them 6 crossed a/c payee undated blank signed cheques with the BoB written as payee. I will be paying EMI from an account where amounts in multiple values of the said loan can be debited.
As I started reading this thread, as a matter of caution I went online to my bank's internet login and issued stop-payment directions for these cheques!
Hopefully I did nothing wrong. If there is some trouble with payment to BoB re car loan, I will pay off the loan immediately.

[tanwaramit]

I am in the process of taking a homeloan. The bank is asking me to give 6 blank checks, to also include the loan amount of the check.

If I had that much amount in my bank account, why would I take a loan from them for that amount?

Does banks like SBI also do this practice?

[whitewing]

Originally Posted by tanwaramit

I am in the process of taking a homeloan. The bank is asking me to give 6 blank checks, to also include the loan amount of the check.

If I had that much amount in my bank account, why would I take a loan from them for that amount?

Does banks like SBI also do this practice?

I thought this was no longer practiced! I've had to give blank cheques for my home loans(almost a decade back) - this was duly acknowledged in writing by the bank in the list of documents in their possession(remember to ask for this).
IIRC, when I closed the loans, at ICICI I had to remind the guys at the bank to hand over the cheques along with the property documents.

Originally Posted by neeraj0272

... as a matter of caution I went online to my bank's internet login and issued stop-payment directions for these cheques!
Hopefully I did nothing wrong.

AFIK, cheques given as security are not supposed to be cancelled - it would be seen as breach of agreement.
The point anyway is moot if you do not miss any EMU payment