Stamp duty waiver on English mortgages mooted

By K. T. Jagannathan

CHENNAI, JAN. 19. A section of the bankers has mooted waiver of stamp duty for English mortgages (also known as conditional mortgages) so as to place banks on a sound legal footing while proceeding against defaulting borrowers.

This will call for an amendment to the Transfer of Property Act through an enabling legislation by Parliament. Banking sources feel that such a move will strengthen the legal position of banks vis-`-vis borrowers. For one, this is expected to facilitate faster recovery of non-performing assets (NPAs). For another, this could prove an useful mechanism to discourage wilful defaults on the part of borrowers.

Currently, banks lend only after taking an equitable mortgage of a property offered as security by any borrower. Under equitable mortgage, original title deeds of a property comes under the possession of the bank which lends to a borrower. In case of a default, the bank will have to move the appropriate court with a civil suit. Only with a court decree can a bank proceed with the auctioning of the mortgaged property of a defaulting borrower. This is proving to be a long drawn-out affair given the current status of Indian legal system.

The banks can avoid this long-winding legal process if they go in for registered mortgages. Under a registered mortgage, the loan transaction between a bank and the borrower is registered after paying a fee. This enables a bank to go ahead with the auctioning of any mortgaged property in the event of a default. There is, however, a catch. If the mortgaged property lies outside `notified cities', the bank has to necessarily go through the legal route. Banks and borrowers alike prefer equitable mortgage because it involves no registration fee.

In English or conditional mortgage, the lending banks become the owner of title of the property that is being offered as security by a borrower at the time of disbursal of the loan. The understanding is that the bank concerned will transfer back the ownership of the title of the property to the borrower once he pays up in full. As the law exists today, one has to pay stamp duty of about 14 per cent for transfer of ownership of a title. This means that both the bank and the borrower end up paying stamp duty. The bank pays the stamp duty at the time of disbursing the loan when it becomes the title owner of the property pledged under English mortgage by a borrower. When the borrower retires the debt, he too pays stamp duty to reclaim the ownership of the title of the property. Hence, the English mortgage is not practised in India.

If the stamp duty is waived, banks can go in for English mortgages. This will mean that in case of defaults, the lending bank need not worry about going through the court route to recover the money. For, it is already the owner of the title of the property so pledged. Hence, it can straightway resort to sale of the mortgaged property and recover its dues.

It is yet unclear if the Government will react favourably to the suggestion for waiving stamp duty. The reasons are not far to seek. Stamp duty has been a major source of income for the governments. Any decision to scrap it will surely have a lot of revenue implications which will have bearings on the financial health of the governments.

Banking industry sources, nonetheless, feel that stamp duty waiver could be done selectively for banks' loan transactions without in any way hurting the revenue-raising capabilities of the governments.

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