‘Borrowers are duty bound to repay debt’- Supreme Court

SOURCE :Aug, 2010, 05.16AM IST, Sanjay K Singh,ET Bureau


NEW DELHI: Expressing concern over the misuse of legal processes to frustrate the recovery proceedings of banks and financial institutions, the Supreme Court has said that the borrowers are duty bound to repay the due debt and any lapse in this regard will invite serious action.


The court, allowing the plea of appellant Indian Bank, directed the defaulter borrower to deposit Rs 3 crore with the lender, noting that the present case is “ illustrative of how a defaulting borrower can use the court process for frustrating the action initiated by a bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, for recovery of its dues”.


A bench comprising justice GS Singhvi and justice AK Ganguly said: “The court cannot lose sight of the fact that the bank is a trustee of public funds. It cannot compromise public interest for benefiting private individuals. Those who take loan and avail financial facilities from the bank are duty bound to repay the amount strictly in accordance with the terms of the contract. Any lapse in such matters has to be viewed seriously and the bank is not only entitled, but also duty bound to recover the amount by adopting all legally-permissible methods.”


The court said: “The parliament enacted the Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) because it was found that legal mechanism available till then was wholly insufficient for the recovery of the outstanding dues of banks and financial institutions.”


In this case, the Indian Bank had sanctioned loan to M/s NS Investments, a Chennai-based partnership firm in 1989 and again in 1991. After some time, the account of the borrower was declared as non-performing asset.


In 1995, M/s Blue Jaggers Estate took over the assets and liabilities of the firm. Since it failed to clear the outstanding dues, the bank filed an application before Debts Recovery Tribunal for recovery of Rs 2,15,38,158 with interest, which is pending.


During its pendency, the parties signed joint memo of compromise on June 23, 2004. The bank agreed to accept an amount of Rs 153.50 lakh towards full and final settlement of its claim against the outstanding due of Rs 661.30 lakh.


The borrower did not pay full amount in terms of the compromise and as a result the bank acquired the right to recover all dues, it signed another compromise with the borrower which undertook to pay the balance amount of Rs 63.50 lakh.
It was not accepted by the bank.



The Tribunal took cognizance of the compromise deeds signed by the parties and observed that the bank is entitled to recover the outstanding dues because the borrower had failed to fulfil its commitment in accordance with the terms of compromise.


The Debts Recovery Appellate Tribunal granted interim stay on recovery proceedings, subject to the condition of deposit of Rs 3 crore.


The borrower then filed a writ petition in the high court for an absolute and unconditional stay of the recovery proceedings. It was dismissed.



Aggrieved, the borrower filed Special Leave Petition in the apex court which was dismissed.



Since the borrower did not comply with the order passed by the Appellate Tribunal, the bank auctioned some of the mortgaged properties for which bids of Rs 5 crore were received.



Thereafter, the borrower filed three applications before the Appellate Tribunal for waiver of the requirement of pre-deposit enshrined in second proviso to Section 18(1) of the Act.



The Appellate Tribunal, however, took suo motu cognizance of the fact that the notice had been issued to the defaulter for recovery of Rs 9,86,25,736.95 and directed them to deposit Rs 4.50 crore.



This enabled the defaulter to indulge in further litigation. It filed another writ petition in the high court for quashing order of the Appellate Tribunal and another petition for issue of a mandamus to the Tribunal to decide its application.



The high court then not only set aside the second interim order of the Appellate Tribunal, but also nullified the earlier conditional interim order by declaring that as a result of the sale of property worth Rs 5 crore, the requirement of deposit of Rs 3 crore stands satisfied. Aggrieved, the bank had come to the apex court.


In the meantime, the bank issued two notices under Section 13(2) of the Act asking the borrower to pay Rs 6,47,21,885 and Rs 9,86,25,736 which, according to the lender became due.


It was objected by the borrower firm. It filed objections under Section 13(3-A) of the Act claiming that during the pendency of the recovery proceedings instituted under DRT Act, the lender cannot invoke the provisions of the act.


It was turned down by the bank and issued notice on July 26, 2007, under Section 13(4) of the Act for taking possession of the mortgaged properties.


Faced with the imminent threat of sale of the mortgaged properties, the borrower filed an application under Section 17 of the Act for quashing the proceedings initiated by the lender bank.


Again, with the sole objective of delaying the legal process, it filed three applications. A writ petition was also filed in the Madras High Court.
 
The petition was referred by the high court to the Tamil Nadu Mediation and Conciliation Centre.
 
It submitted a report incorporating the offer of the borrower to pay interest for the delayed payment of Rs 63.50 lakh. It was not accepted by the bank.

The Tribunal took cognizance of the compromise deeds signed by the parties and observed that the bank is entitled to recover the outstanding dues because the borrower had failed to fulfil its commitment in accordance with the terms of compromise.



The Debts Recovery Appellate Tribunal granted interim stay on recovery proceedings, subject to the condition of deposit of Rs 3 crore.


The borrower then filed a writ petition in the high court for an absolute and unconditional stay of the recovery proceedings. It was dismissed.


Aggrieved, the borrower filed Special Leave Petition in the apex court which was dismissed.


Since the borrower did not comply with the order passed by the Appellate Tribunal, the bank auctioned some of the mortgaged properties for which bids of Rs 5 crore were received.


Thereafter, the borrower filed three applications before the Appellate Tribunal for waiver of the requirement of pre-deposit enshrined in second proviso to Section 18(1) of the Act.


The Appellate Tribunal, however, took suo motu cognizance of the fact that the notice had been issued to the defaulter for recovery of Rs 9,86,25,736.95 and directed them to deposit Rs 4.50 crore.


This enabled the defaulter to indulge in further litigation. It filed another writ petition in the high court for quashing order of the Appellate Tribunal and another petition for issue of a mandamus to the Tribunal to decide its application.

The high court then not only set aside the second interim order of the Appellate Tribunal, but also nullified the earlier conditional interim order by declaring that as a result of the sale of property worth Rs 5 crore, the requirement of deposit of Rs 3 crore stands satisfied. Aggrieved, the bank had come to the apex court.

Tribunal cancels sale certificate of Canara Bank

SOURCE :ARUN KUMAR, TNN, Jun 23, 2010, 03.59am IST

PATNA: In a case pertaining to Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, the Debts Recovery Tribunal, Patna, has found the Canara Bank main branch, Gandhi Maidan, chief manager on wrong side of the law. The petition was filed against bank authorities by one Dinesh Prasad, a resident of Bakarganj Bazaza Lane, for violation of Sarfaesi Act.



According to the tribunal order, Prasad took term loan from the bank in 2002 to purchase the property — now in question — located at shop no. G-23, Govinda Complex, Govind Mitra Road, and made payment to the bank.

 The bank started debiting the interest illegally on monthly basis which resulted into financial crunch and the applicant was overburdened and the bank illegally classified the account as non-productive account on June 30, 2004 without any information to the applicant.


The notice by the bank was served to Prasad in August 2005 and symbolic possession of the property was taken by the bank on December 30, 2005.


On April 27, 2008, the bank published the sale notice in the newspaper. The petitioner filed a petition before the tribunal within stipulated time limit — on June 11, 2008.


During the pendency of the appeal, the bank executed the sale deed in favour of the single bidder for the property, one Damodar Prasad Santhalia, on August 12, 2008 without seeking permission from the tribunal.


The tribunal noted that in this case the fraud was committed by the bank officials and auction purchaser by giving false affidavits and the bank sold the property during pendency of the appeal. The tribunal order with regard to the public auction said the legal obligation of the bank authorities was to secure the best price, but in this case the respondent bank sold the property at a throwaway price to Santhalia.


Allowing the Sarfaesi appeal of Prasad, the tribunal cancelled the sale certificate and confirmation of the sale certificate.






 

Firm fined for challenging judicial officer's order

Source :Shibu Thomas, TNN, Sep 9, 2010, 12.38am IST


MUMBAI: A firm's attempt to challenge the qualification of a judicial officer after he passed an adverse order backfired in the Bombay high court. A division bench of Justice P B Majmudar and Justice Anoop Mohta imposed a fine of Rs 20,000 on the firm Tiger Jewellery India Pvt Ltd (TJIPL). The firm had alleged that the presiding officer of the Debts Recovery Tribunal (DRT), Mumbai, who had passed an order against them, did not have the requisite experience.




The HC did not agree. "The petitioner having lost before the concerned DRT, has tried to take out the present proceedings in which we do not find any substance,'' said the judges. The court said that the judicial officer had to engage an advocate to defend himself and justify his appointment. "In our opinion, this petition is nothing but a vexatious proceeding,'' said the HC and asked the firm to shell out the fine to the parties within two weeks. This follows the recent guidelines by the Supreme Court to impose exemplary costs on persons who file frivolous petitions.



In the present case, proceedings were initiated against TJIPL before the DRT. In June 2009, the presiding officer, Vijay Kumar, rejected TJIPL's plea to keep his case for urgent hearing. Subsequently, TJIPL filed the petition claiming that Kumar was not qualified to head the tribunal as he did not have the requisite qualification of practising as an advocate for seven years.



The Union government pointed out that Kumar belonged to the Indian Legal Service and had enrolled as an advocate in 1978 and represented the Centre in various capacities. He had at least 11 years of practice in various courts. The HC agreed that Kumar was eligible for the post. "It is not necessary that for all these seven years, he should be an actively practising advocate,'' said the court.

Time for some quick action by banks, RBI

Source :M. Sitarama Murty : BusinessLine :16 Aug 2010

The Reserve Bank of India made the first move in raising interest rates and the banks in turn have begun moving both the deposit and loan rates northwards. In a growing economy, the demand for credit will increase, but liquidity may not come under pressure in the near term. Savings too should grow in tandem but not at the same rate, thanks to the inflation that made a dent in the domestic budgets.

The rate movements appear to be fuelling undesirable competition amongst the bankers, a scenario, reminiscent of the unwarranted rate war three years ago. With the busy season still far away, banks have begun offering rates out of tune with their asset-liability management needs. This will only lead to erosion of margins and pressure on profits.

Raising resources

Any effort to pass on the burden to the borrowers would be resisted by looking at alternative ways for raising resources. Some have revived the FD route and before long the CP market would become active. Options of ECB/ FCCBs too are being seriously considered. Some banks reportedly are lobbying with the RBI for sub-Base Rate lending, but the RBI is unlikely to oblige. The banks would be compelled to subscribe to CPs at low rates.

The news on the NPAs front is not encouraging. Export and realty sector are yet to come out fully from the recessionary impact. The SME sector suffered major damage and would not be able to recover easily. The storm has receded, but it will be some more time before complete recovery is seen. The recent European crisis has only added to the anxiety. To reduce the NPAs, banks, perforce, would choose the ‘compromise' route with concomitant sacrifices.

Provisioning on NPAs

The RBI has advised the banks to achieve a level of 70 per cent provisioning on NPAs by September. For the banks at a lower level, it translates into making up for the deficit plus providing 70 per cent for all the new NPAs. Banks already at 70 per cent have to provide 70 per cent for the additions, to maintain the level. This amounts to providing for NPAs at prescribed rates in the normal course and making up for the shortfall by way of a floating provision. In the earlier years, the floating provision was handy as, in lean years and in case of need, banks could use it for making provisions for specific assets. This flexibility is no more available. Banks can only reckon it as tier-II capital. Apart from lack of adequate surpluses this acts as a disincentive. Two major banks have approached the RBI for more time to achieve the 70 per cent norm. Others will follow suit if the outcome is favourable.

Two developments that need urgent and serious consideration are the fresh option given for pension and the raising of the statutory limit for gratuity from Rs 3.5 lakh to Rs 10 lakh. The Indian Banks' Association has sent to the RBI a proposal for amortising this liability over a period of five years, as was done once in the past. The ICAI too has to take a view on this measure. The Income-Tax Department will have to give its nod for deferring the liability. The Basel-II discipline and the need to move over to IFRS do not leave much leeway for manoeuvring.

Though estimates vary widely, the burden could be in the range of Rs 20,000-30,000 crore depending on the number of employees switching over to pension now, their pay range and age profile. Better life expectancy, attractive pension packages and low interest rate regime prompted many to reverse their earlier decision. Banks have been resisting the demand for a second option, but the Government seems to have persuaded them. Add to this the need for setting aside Rs 8,000-10,000 crore for the steep rise in the statutory limit for payment of gratuity. Though it is known to be a consequence of the Sixth Pay Commission, the increase was sudden and steep.

There are no easy options and the banks should be ready to bite the bullet. The huge provisions could drive some banks into red or eat into their reserves, bringing down the capital adequacy, while the business needs and implementation of the Basel-II regime dictate an improvement. For the first quarter, banks have followed different options. Only an urgent resolution of the issue will leave some breathing time to banks to prepare.

Another worry for the banks is to ensure that capital to risk-weighted asset ratio doesn't fall because of the unrated assets in their books which carry higher risk weight and additional capital charge. Save for very large and reputed corporates, at least 75 per cent of the borrowers don't carry an external rating tag by approved agencies. It would be a task to get them agree to and abide by the discipline. Poor ratings in turn should mean stiffer interest rates, but banks may not risk loss of business and would rather sacrifice the risk-based pricing philosophy.

Agriculture advances

The pressure on earnings comes from yet another largely ignored source. Banks with agriculture advances less than 18 per cent of their net bank credit have to invest in Rural Infrastructure Development Fund (RIDF) of Nabard, at interest rates of 3.5 to 5 per cent, depending on the amount of shortfall. Assuming an average return of 7 or 8 per cent on agricultural loans, a whopping loss of three-four per cent on the investments running in to thousands of crores of rupees is a big blow to the banks. The position is relatively comfortable in a few public sector banks while it is difficult in private banks. The interest subvention of the government to the extent of 2 per cent is confined only to the public sector banks and is a clear disincentive amounting to discrimination for the private banks to achieve the bench mark. Farmers naturally prefer to deal with PS banks both for the incentive and a belief that only the ‘sarkari' banks can write-off their loans, at the instance of the government.

Microfinance institutions

The banks falling short on agricultural lending try to make it up partly by buying out at low rates the portfolios of microfinance institutions, that are known to charge to the ultimate borrowers anywhere between 15-24 per cent. This disguised securitisation would encourage more vigorous expansion of the microfinance institutions, some of which have already reached optimum level in terms of geographical spread, number of branches/accounts and ability to monitor and control operations.

Solutions and decisions have to come fast for these problems as hardly eight months are left in this year.

(The author is former Managing Director of State Bank of Mysore. Email: murthy@mandavilli.com)

Central bank of india plans to reduce NPAs

Source:The Hindu:Aug 11,2010:Corporate Reporter






CHENNAI: In an effort to reduce NPA (non-performing assets) accounts, Central Bank of India which is entering shortly its centenary year, has been taking various steps by resorting to out of court settlements.



Addressing presspersons here on Tuesday, S. Kannan, General Manager, Chennai Zone, said the bank had organised Lok Adalat, exclusively for DRT (Debt Recovery Tribunal) cases on August 6 under the auspices of Tamil Nadu State Legal Services Authority. Mutual negotiation was undertaken with various litigants from different DRTs functioning in Tamil Nadu and the bank had settled 24 cases involving an amount of Rs. 12.35 crore, Mr. Kannan said.



Early in January an adalat was conducted for DRT and non-DRT cases and 225 cases were settled for Rs. 13.50 crore. I



t was proposed to conduct another adalat next month exclusively for pre-litigation cases pertaining to Chennai city, Mr. Kannan said.



On the performance of Chennai Zone, Mr. Kannan said the zone comprising Tamil Nadu, Kerala and Puducherry achieved a business of Rs. 16,300 crore with Tamil Nadu alone contributing Rs. 12,462 crore.


The credit deposit ratio of the bank in Tamil Nadu was 158 per cent with deposits of Rs. 4,869 crore and advances of Rs. 7,593 crore.


For the current financial year, the plan was to increase the business of this zone to Rs. 20,000 crore.

Asset reconstruction cos seek hike in FDI limit

 

source: BL :Mumbai, May 26,2010

Asset reconstruction companies have moved the Government and the Reserve Bank of India to up the foreign direct investment limit in their equity capital as also the foreign institutional investment limit in each tranche of security receipts (SRs) issued by the companies from 49 per cent to 74 per cent.

Speaking to reporters on the sidelines of a FICCI seminar, Mr M.S. Verma, Chairman, International Asset Reconstruction Company Ltd, reasoned that when foreign investment up to 74 per cent was allowed in systemically important private sector banks, there was no reason why foreign investment in ARCs and the SRs issued by them should be capped at 49 per cent.

The need for upping the foreign investment limit in ARCs has arisen as raising funds from the domestic markets to buy non-performing assets from banks is proving to be a constraint as ARCs are perceived as high-risk enterprises.

According to Mr P.H. Ravikumar, Managing Director and Chief Executive Officer, Invent Assets Securitisation & Reconstruction Pvt Ltd, specialised international funds, which have an appetite for investing in non-performing assets, could easily fill the funding gap if the foreign investment limit is raised.

As the situation obtains now, the maximum foreign equity should not exceed 49 per cent of the paid-up equity capital of an ARC.

Further, foreign institutional investors registered with the Securities and Exchange Board of India can invest only up to 49 per cent of each tranche of scheme of security receipts subject to the condition that investment of a single FII in each tranche of scheme of SRs does not exceed 10 per cent of the issue.

To help ARCs get over capital constraints, it is understood that the RBI is considering raising the FII investment limit in SRs issued by ARCs to 74 per cent. Further, the single FII investment limit in each tranche of scheme of SRs is likely to be raised to 24 per cent from 10 cent now.

Mr M.R. Umarji, Chief Legal Adviser, Indian Banks' Association, said the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act could be suitably amended to raise the FDI limit in ARCs to 74 per cent while the RBI could suitably amend the guidelines on FII investment in SRs issued by ARCs.

ARCs are formed to acquire non-performing loans (NPLs) from banks and financial institutions with the objective of focused management and optimal recovery, thereby, relieving banks and financial institutions of the burden of NPL and allowing them to focus on core activities. Banks are left with cleaner balance sheets and do not have to deal with problem clients.

Federal Bank - Demand Notice