Supreme Court on enforcement of OTS scheme by public sector banks/DRT/DRAT in terms of guidelines issued by RBI
If a public sector bank is otherwise bound by any guidelines issued by the RBI, there can be no reason as to why the same cannot be enforced in terms of the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by the Tribunal (DRT) and consequently by the Appellate Tribunal (DRAT).
SUPREME COURT OF INDIA
Punjab & Sind Bank
Civil Appeal Nos. 4970-4971 of 2009
July 31, 2009
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14. The Reserve Bank of India is a statutory authority. It exercises supervisory power in the matter of functionings of the Scheduled Banks. The matter relating to supervision of Scheduled Banks is also governed by the Reserve Bank of India Act. For the aforementioned purpose, the Reserve Bank is entitled to issue guidelines from time to time.
15. The Parliament also enacted the 1949 Act to consolidate and amend the law relating to banking. Section 5(l) of the 1949 Act defines "Reserve Bank" to mean the Reserve Bank of India constituted under Section 3 of the Reserve Bank of India Act, 1934.
By reason of various provisions of the 1949 Act, the Reserve Bank is
empowered to control and supervise the functioning of the Scheduled Banks. The 1949 Act also provides for power of the Reserve Bank to control advances by banking companies in terms of Section 21 of the 1949 Act which reads as under:
"21 - Power of Reserve Bank to control advances
by banking companies
(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined.
(2) Without prejudice to the generality of the power vested in the Reserve Bank under sub-section (1) the Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular, as to-
(a) the purposes for which advances may or may not be made, (b) the margins to be maintained in respect of secured advances,
(c) the maximum amount of advances or other financial accommodation which, having regard to the paid-up capital, reserves and deposits of a banking company and other relevant considerations, may be made by that banking company to any one company, firm, association of persons or individual,
(d) the maximum amount up to which, having regard to the considerations referred to in clause
(c),guarantees may be given by a banking company on behalf of any one company, firm, association of persons or individual, and
(e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.
(3) Every banking company shall be bound to comply with any directions given to it under this section."
16. A bare perusal of the aforementioned provision would clearly show that the Reserve Bank of India is entitled to formulate the policies which the banking companies are bound to follow. Sub-section (3) of Section 21 of the 1949 Act clearly mandates that every banking company shall be bound to comply with the directions given to it in terms thereof. Section 35A of the 1949 Act, which was inserted by the Banking Companies (Amendment) Act, 1956, empowers the Reserve Bank to issue directions inter alia in the interest of banking policy. Section 36 of the 1949 Act also provides for further powers and functions of the Reserve Bank of India; clause (d) of Sub-section (1) whereof reads as under:
"36. Further powers and functions of Reserve
Bank - (1) The Reserve Bank may-
(a) *** *** ***
(b) *** *** ***
(c) *** *** ***
(d) at any time, if it is satisfied that in the public interest or in the interest of banking policy or for preventing the affairs of the banking company being conducted in a manner detrimental to the
interests of the banking company or its depositors it is necessary so to do, by order in writing and on such terms and conditions as may be specifiedtherein-
(i) require the banking company to call a meeting of its directors for the purpose of considering any matter relating to or arising out of the affairs of the banking company; or require an officer of the banking company to discuss any such matter with an officer of the Reserve Bank;
(ii) depute one or more of its officers to which the proceedings at any meeting of the Board of directors of the banking company or of any committee or of any other body constituted by it; require the banking company to give an opportunity to the officers so deputed to be heard at such meetings and also require such officers to send a report of such proceedings to the Reserve Bank;
(iii) require the Board of directors of the banking company or any committee or any other body constituted by it to give in writing to any officer specified by the Reserve Bank in this behalf at his usual address all notices of, and other communications relating to, any meeting of the Board, committee or other body constituted by it;
(iv) appoint one or more of its officers to observe the manner in which the affairs of the banking company or of its offices or branches are being conducted and make a report thereon;
(v) require the banking company to make, within such time as may be specified in the order, such changes in the management as the reserve Bank may consider necessary."
17. We may, however, place on record that the Parliament, in its wisdom, inserted Section 36A of the Act by the Banking Companies (Amendment) Act, 1959 in terms whereof some of the provisions of the 1949 Act were not to be applied to certain banking companies.
18. Indisputably, the guidelines were issued by the Reserve Bank of India by reason of a letter dated 3.09.2005 addressed to the Chairman/ Managing Director of all public sector banks. It clearly refers to a circular dated 19.08.2005 issued by the Reserve Bank of India in terms whereof it was directed that one time settlement scheme for recovery of NPA below Rs. 10 crore was laid down. The said letter was issued pursuant to the aforementioned circular in terms whereof one time settlement scheme was formulated for recovery of NPA below Rs. 10 crores. It was categorically stated therein that the same was required to be implemented by all public sector banks. The guidelines issued were to provide a simplified, non- discretionary and non-discriminatory mechanism therefor in SME sector. It was categorically stated that all public sector banks shall uniformly implement these guidelines.
19. Respondent - Bank concededly is a public sector bank. It was, therefore, bound by the said guidelines. Salient features of the guidelines are as under:
"(c) The guidelines will cover cases on which the banks have initiated action under the Securitization and Reconstruction of financial Assets and Enforcement of Security Interest Act, 2002 and also cases pending before Courts/DRTs/BIFR subject to consent decree being obtained from the Courts/DRTs/BIFR"
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(ii) Settlement Formula amount
a) NPAs classified at Doubtful or Loss as on March 31, 2004. The minimum amount that should be recovered in respect of compromise settlement of NPAs classified as doubtful or loss as on 31st March 2004 would be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPA.
b) NPAs classified as sub-standard as on 31st March, 2004 which became doubtful or loss subsequently:
The minimum amount that should be recovered in respect of NPAs
classified as sub-standard as on 31st March, 2004 which became doubtful or loss subsequently would be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPAs plus interest at existing Basic Prime Lending Rate from 1st April, 2004 till the date of final payment."
The amount of settlement arrived at in both the above cases, should
preferably be paid in one lump sum. In cases where the borrowers are unable to pay the entire amount in one lump sum, at least 25% of the amount of settlement should be paid upfront and the balance amount of 75% should be recovered in installments within a period of one year together with interest at the existing Prime Lending Rate from the date of settlement up to the date of final payment.
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(V) Non-discretionary treatment:
Banks shall follow the above guidelines for one time settlement of
all NPAs covered under the scheme, without discrimination and a monthly report on the progress and details of settlement should be submitted by the concerned authority to the next high authority and their Central Office.
Banks may go for wide publicity and also give notice January 31, 2006 to the eligible defaulting borrowers to avail of the opportunity for one time settlement of their outstanding dues in terms of these guidelines. Adequate publicity to these guidelines through various means must be ensured.
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4. Any deviation from the above settlement guidelines for any
borrower shall be made only by the Board of Directors."
The said circular letter was issued by the Chief General Manager of the Reserve Bank of India. The High Court in its impugned judgment inter alia was of the opinion that he had no authority therefor.
20. Before, however, adverting to the question as to whether the Board of Directors of the respondent -Bank could deviate from the aforementioned guidelines and, if so, to what extent, we may notice the following correspondences, which was exchanged by the parties hereto, so as to enable us to consider as to whether the respondent - Bank had itself applied the said guidelines in case of the appellants or not.
21. We may notice that the respondent - Bank appears to have accepted the said guidelines as is evident from the letter dated 24.11.2005 by the respondent Bank to the appellants in the following terms:
"As per head office guidelines, one time settlement scheme for recovery of NPA accounts upto 10 crores has been formulated. Your account also falls within this scheme. As the said scheme is Non-discretionary, you are advised to come forward for settlement of your account as per terms & conditions of the scheme"
Clauses 4.1 and 4.2 read as under:
"4.1 NPAs classified as Doubtful or Loss as on 31st March 2004:
The minimum amount that should be recovered in respect of compromise settlement of NPAs classified as doubtful or loss as on 31st March, 2004 would be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPA.
4.2 NPAs classified as sub-standard as on 31st March, 2004 which became doubtful or loss subsequently:
The minimum amount that should be recovered in respect of NPAs classified as sub-standard as on 31st March, 2004 which became doubtful or loss subsequently would be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPAs plus interest at existing Basic Prime Lending Rate from 1st April, 2004 till the date of final payment."
Under the heading "Non-Discretionary Treatment", the bank stated:
"7.1 RBI has advised that the guidelines for compromise settlement of NPAs in SME sector are non-discretionary and non-iscriminatory. Therefore, if the borrower fulfills the eligibility criteria for consideration of OTS under these guidelines then amount of OTS will be determined strictly in terms of Clause No.4.1 and 4.2 above irrespective of any other factor."
22. Furthermore, the respondent - Bank in its letter dated 1.12.2005, stated:
"Please refer our letter regarding the above mentioned policy of R.B.I. We are again enclosing herewith the photocopy of the policy. You are requested to come forward as per policy for settlement of the account at your earliest."
The respondent - Bank yet again in its letter dated 01.03.2006, stated:
"This is in continuation of our letter dated 17.02.2006 on the above subject. Please note the OTS scheme of RBI is valid upto 31.03.2006 as such please send your request well within the last date so that the proposal may be put up to the competent authority."
23. It is on the aforementioned premise, the merit and purport of the correspondences exchanged between the parties must be considered. The said correspondences clearly show that the respondent - Bank had resorted to the guidelines issued by the Reserve Bank of India alone and pursuant to or in furtherance of the offer made by the bank, a proposal came to be made by the appellants in terms of its letter dated 2.03.2006; the relevant portion whereof reads as under:
"2. As per RBI guidelines, the minimum amount that shall be recovered in respect of one time settlement of NPAs classified as doubtful of loss as on march 31, 2004 will be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPA. As the outstanding balance in our account as on March 31, 2004 was Rs.285.38 lacs, the settlement amount in respect on one time settlement of our account works out to be Rs.283.38 lacs as per RBI guidelines, out of which we have already deposited a sum of Rs.26.76 lacs (including Rs.25.00 lacs in Third Party No lien account subject to the condition that the said amount shall be appropriated by the bank only after approval of compromise proposal submitted by us plus Rs.1.76 lacs in instalments). Hence we are unable to understand how you have worked out the minimum recoverable amount to be Rs.370.49 lacs.
3. RBI guidelines on OTS for SME account nowhere links the amount that shall be recovered with the fair market value of the security charged to the bank. The fair market value of security is just an assessment of the market value of the security and not the actual value of the security.
4. RBI guidelines are very clear for one time settlement of dues for SME accounts with outstanding of Rs.10.00 crore or less before March 31, 2004, that those account should be settled at principal amount.
5. NPAs classified as doubtful as on March 2004 are settling their accounts as per these guidelines. We also seek justice and deserve the right to settle our account strictly as per RBI guidelines, which are non-discretionary and non- discriminatory in nature. Its worth while to mention here that other nationalized bank in country are settling NPAs as per guidelines of RBI.
However, to avoid any further litigations and to show our sincere intentions to settle the account, we are even ready to pay the interest for 2 years, as per your instructions and categorization, upto the time when the account was first categorized as "doubtful" by bank. Therefore, we request you to consider our proposal for one time settlement at Rs.345.31. The proposed amount of Rs.345.31 lacs has been arrived at as the amount which would have been outstanding in our account on the date when our account was categorized "doubtful" for the first time, i.e., by adding interest for 2 years at PLR Rs.59.93 lacs on the amount of Rs.285.38 lacs which was outstanding in our account as on the date when our account was categorized as non performing asset."
24. Such a proposal was made bona fide. It was within the framework of the guidelines issued by the Reserve Bank of India.
27. The said order of the Punjab and Haryana High Court dated 21.11.2006 again indisputably has been affirmed by this Court. But, in our opinion, the same by itself did not preclude the appellants to approach the Appellate Tribunal. The jurisdiction of the appellate tribunal is co-extensive with the powers of the Tribunal. The memo of appeal filed by the appellants before the Tribunal clearly shows that the contentions with regard to the enforcement of the aforementioned provisions had been made therein.
28. It is, therefore, not correct to contend that no pleadings were made for the purpose of enforcing the RBI guidelines in respect of one time settlement.
29. It may be that no specific prayer was made but the same, in our opinion, keeping in view the provisions of the 2002 Act, did not preclude the Appellate Tribunal to consider the offer of the appellants. The Appellate Tribunal in terms of the provisions of the Act like the original Tribunal is interested only in recovery of the amount. While doing so, it, in our considered opinion, has the requisite jurisdiction to consider the prayer made by a debtor for one time settlement particularly in view of the fact that the same is within the purview of One Time Settlement Scheme of the Reserve Bank of India. If a public sector bank is otherwise bound by any guidelines issued by the Reserve Bank of India, we see no reason as to why the same cannot be enforced in terms of the provisions of the Act by the Tribunal and consequently by the Appellate Tribunal. It is not a case where the appellants had prayed for quashing of a policy decision taken by the respondent -Bank. The question which arose for consideration before the Appellate Tribunal as also before the High Court was as to whether offer having been made by the bank to the appellants herein, it could have turned around and contend that only because the appellants had furnished security to the extent of Rs. 11 crores, the same by itself would entitle it to take recourse to a discriminatory treatment. The answer to the said question must be rendered in the negative.
31. The Board of Directors of the Bank itself had accepted the guidelines. It, however, in its own guidelines, stated:
"II.3 After calculation of the MRA as per point II.1 and II.2 above, due consideration to Securities available charged in the case is to be given, in case of secured and partially secured assets. In these accounts, MRA is to be calculated as under:
MRA = 70% of the value of securities as per valuation certificate, issued in terms of Law Circular No. 171."
32. Does it satisfy the non-discriminatory clause laid down by the Reserve Bank of India and accepted by the Reserve Bank is the question. While making a deviation, the Board of Directors of a public sector bank could not have taken recourse to a policy decision which is per se discriminatory. Respondent - Bank is a `State' within the meaning of Article 12 of the Constitution of India apart from the fact that it is bound to follow the guidelines issued by the Reserve Bank of India.
33. If, therefore, the broad policy decisions contained in the guidelines were required to be followed, the power of the Board of Directors to make deviation in terms of Clause 4 thereof would only be in relation to some minor matters which does not touch the broad aspects of the policy decision and in particular the one governing the non-discriminatory treatment. In a case of this nature, we are satisfied that the respondent - Bank is guilty of violation of the equality clause contained in the Reserve Bank of India guidelines as also Article 14 of the Constitution of India.
34. The fact that the appellants were defaultors is not in dispute. It is also not in dispute that it comes within the purview of the Small and Medium Enterprises sector.
35. It is furthermore not in dispute that the respondent - Bank itself had made an offer to accept the proposal of the appellants in regard to enforcement of one time settlement pursuant to the RBI guidelines. Indisputably, it was all along aware that the amount of securities was lying with it. It is only pursuant thereto the directions had been issued by the Tribunal
36. The question as to whether the guidelines issued by the Reserve Bank of India are binding or not now stands concluded by reason of a Constitution Bench Judgment of this Court in Central Bank of India v. Ravindra and Others [(2002) 1 SCC 367] in the following terms:
“55... (5) The power conferred by Sections 21 and 35-A of the Banking Regulation Act, 1949 is coupled with duty to act. The Reserve Bank of India is the prime banking institution of the country entrusted with a supervisory role over banking and conferred with the authority of issuing binding directions, having statutory force, in the interest of the public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company generally. The Reserve Bank of India is one of the watchdogs of finance and economy of the nation. It is, and it ought to be, aware of all relevant factors, including credit conditions as prevailing, which would invite its policy decisions. RBI has been issuing directions/circulars from time to time which, inter alia, deal with the rate of interest which can be charged and the periods at the end of which rests can be struck down, interest calculated thereon and charged and capitalised. It should continue to issue such directives. Its circulars shall bind those who fall within the net of such directives. For such transaction which are not squarely governed by such circulars, the RBI directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy."
40. If in terms of the guidelines issued by the Reserve Bank of India a right is created in a borrower, we see no reason as to why a writ of mandamus could not be issued. We would assume, as has been contended by Mr. Singh, that while exercising its power under Article 226 of the Constitution of India, the High Courts may or may not issue such a direction but the same, in our opinion, by itself, would not mean that the High Court would be correct in interfering with an order passed by the Appellate Tribunal which was entitled to consider the effect of such one time settlement.
41. The question pertaining to the present matter is regarding whether or not a circular issued by a statutory body for the governance and regulation of certain agreements confers a legal right upon the aggrieved party in case of non-compliance or complete and absolute deviation from the said guidelines by the body formulating such circulars. Alternately, can the aggrieved party, then, claim its right of judicial review under Article 32 or 226 to quash the said circular in case of discriminatory application of such rules/guidelines so mentioned in the circular.
46. As regards the Reserve Bank of India guidelines, it was the direction of the Appellate Tribunal that the Respondent-Bank should settle the case of the appellants under the RBI guidelines through a One Time Settlement and should invite a proposal for settlement and recovery of the agreed amount.
47. The Appellate Tribunal in passing its order followed the dicta laid down in Constitution Bench judgment in Central Bank of India (supra), wherein it was held that:
".....RBI directive have not only statutory flavour, any contravention thereof or any default in compliance therewith is punishable under sub-section (4) of S. 46 of the Banking Regulation Act, 1949".
48. We, therefore, are of the opinion that the impugned judgment cannot be sustained. It is set aside accordingly. The appeals are allowed. However, in the facts and circumstances of the case, there shall be no order as to costs.
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