If borrower is contesting the loan notice sent by lender, can lender sell flat mortgaged directly?

As there is no stay / injunction against you accordingly there is no such restrainment to dispose off the property, if otherwise you are entitled/ titleholder. 

You cannot sell without court order, you have to file suit for decree 

Dr. Vashista, I only have title Deeds with me and an MOU but he is contesting the interest rate in the MOU.

 you have a loan agreement with your friend, which includes a specified interest rate of 18% simple interest per annum. If your friend is contesting the interest rate, you may need to explore legal options to resolve the dispute. As the lender, you have the right to enforce the terms of the loan agreement, including the interest rate. However, selling the flat without your friend's consent or a court order may not be a straightforward process. In India, the SARFAESI Act, 2002, allows secured creditors (lenders) to enforce their security interest (mortgage) without intervention from the court. However, this act applies to specific financial institutions, and it's unclear if it applies to individual lenders like yourself. To avoid potential legal complications, consider the following steps: 1. Review the loan agreement: Ensure the agreement is clear, concise, and includes all necessary terms and conditions. 2. Communicate with your friend: Try to resolve the dispute amicably by discussing the interest rate and other terms. 3. Legal notice: Send a legal notice to your friend, reiterating the terms of the loan agreement and demanding  If your friend continues to contest the interest rate, consult a lawyer specializing in property and banking laws. They can guide you on the best course of action. 5. Court proceedings: If necessary, initiate court proceedings to enforce the loan agreement and recover the debt.

The property documents handed over to you are  collateral security for the loan amount.

You may file a suit  for recovery of loan amount and file an applicaiton along with the suit requesting the court  for attachment of his property before judgment for security stating that he is trying to sell the property by some fruaudlent means.

Then you conduct the case and obtain a decree in your favor subsequent to which you can file an execution petition to execute the court orders for recovery of your loan amount in the manner as prescribed in law,.

Thank all of you for a good set of suggestions. It appears that I will have to go to Court. I cannot sell the flat directly. That is what he wants me to do to just drag the issue. Is my reading on his strategy correct? In any case, it will be difficult to sell the flat because nobody will want to buy one in the middle of a dispute.

You were informed that without a court order the property canot be broughy under auction sale, hence you may have to wait for the court to pass an order to sell the property if the money recovery suit is decreed in your favor and the court is passing an order to sell the property in the execution petition.

Being an equitable mortgage by deposit of title deeds you cannot sell the property under mortgage.