SBI Vs Vijay Kumar-High Court- Writ- judgement

CASE NO.:

Appeal (civil)  1573 of 2007

PETITIONER:

State Bank of India

RESPONDENT:

Vijay Kumar

DATE OF JUDGMENT: 26/03/2007

BENCH:

Dr. Arijit Pasayat & Lokeshwar Singh Panta

JUDGMENT:

JUDGMENT
DR. ARIJIT PASAYAT, J.

1. Leave granted.

2. Challenge in this appeal is to the order passed by the Division Bench of
the Punjab and Haryana High Court allowing the writ petition filed by the
respondent.

3. The background facts which are almost undisputed are as follows:
The appellant-bank field a recovery petition before the Debt Recovery
Tribunal, Chandigarh (in short `DRT’).

The amount claimed was
Rs.14,92,295.99. The decree was passed and revision petition was filed by
the appellant-bank. A compromise deed was filed at the Lok Adalat setting
out the different terms of settlement. The relevant term was that the
respondent was to deposit 20% of the compromise/settlement amount within 30
days i.e on or before December 28, 2003 and the remaining amount of
Rs.8,00,000/- was to be paid in equal monthly/quarterly/half yearly
instalment on or before March 31, 2004. There was also a failure clause
setting out the consequences of default in payment according to the time
schedule. DRT passed an order in terms of the compromise. Undisputedly
there was some default in payment. Since the appellant-bank took the view
that there was non-compliance with the terms of the compromise/settlement,
therefore, the appellant-bank was entitled to recover the entire decreetal
amount.

4. A writ petition was filed before the High Court indicating the
difficulities on account of which the payments could not be made in time.
The High Court took note of the fact though there was some default on the
part of the respondent the entire amount had been paid by 12th July, 2004
along with interest of Rs.45,000/- for the defaulted period. The High Court
held that the difficulties were genuine. The respondent had proved his bona
fide by making the payment of whole amount as agreed to in the compromise
and that also paid for the defaulted amount.

5. The High Court was of the view that the first instalment was paid in
time. Therefore, it accepted the stand of the writ petitioners and held
that the compromise should be acted upon but directed the bank to charge
interest for the defaulted period @ 10.4% p.a.. A sum of Rs.20,000/- which
was deposited pursuant to the order of the High Court was directed to be
adjusted for publication charges etc.

6. In support of the appeal learned counsel for the appellant-bank
submitted that the High Court has wrongly held that the first instalment
was made in time. Additionally, when the amounts had not been paid
according to the fixed schedule the default clause operated and the High
Court could not have come to the aid of a defaulter.

7. Learned counsel for the respondent submitted that High Court took note
of all the relevant factors, the bona fides of the respondent and even had
directed charging of interest which in fact has been charged by the
appellant bank and has been paid. Normally, when there is failure of the
terms of the settlement the default clause, if provided, operates.

Therefore, in the peculiar features appellant-bank agreed to settle the
claim taking into account various factors. It is true that the High Court
has erroneously recorded that Rs.2,00,000/- has been paid within the
stipulated time. The details of the payment are as follows:

S. No. Date of       Amount      Mode of Payment
Payment

1. 28.12.2003   Rs.90,000 Cash deposited with the Respondent
bank

2. 2.1.04     Rs.20,000 Cash deposited with the Respondent
bank

3. 5.1.04     Rs.10,000 Cash deposited with the Respondent
bank

4. 25.4.04     Rs.3,80,000 Cash deposited with the Respondent
bank

5. 12.7.04     Rs.5,00,000 Vide bank draft deposited with the
Recovery officer.

Total     Rs.10,00,000

8. Additionally, we find that the respondent had paid Rs.45,000/- as
interest for the defaulted period. Interestingly, pursuant to the direction
of the High Court the appellant-bank had charged interest of Rs.29,353/-.
There into arrangements with third party for selling the property but the
payment in respect of the sale was to be made directly to the bank.

9. It is noted that Bank at no point of time before the final payment was
made appears to have indicated that settlement failed because of failure to
stick to the time schedule.

10. Above being the position, we do not find this to be a fit case where
jurisdiction under Article 136 of the Constitution of India, 1950 is to be
exercised. The appeal is dismissed.

Are Non Performing Assets Gloomy from Indian Perspective ?

By : Arpita on 14 February 2010

 

Introduction :
When a borrower, who is under a liability to pay to secured creditors,
 makes any default in repayment of secured debt or any installment thereof, the
 account of borrower is classified as nonperforming assets (NPA) .NPAs cannot
be used for any productive purposes because they reflect the application of scarce
capital and credit funds. Continued growth in NPA threatens the repayment capacity
 of the banks and erodes the confidence reposed by them in the banks.

 In fact high level of NPAs has an adverse impact on the financial strength of
 the banks who in the present era of globalisation, are required to conform to
stringent International Standards. “Non Performing Asset” means an asset or
account of a borrower, which has been classified by bank or financial institution
 as substandard, doubtful or loan asset . After nationalisation and globalisation
the initial directive that banks were given was to expand their branch network,
increase the saving rate and extent credits to rural, urban and the most important
SSI sectors .

 No doubt this mandate has been achieved admirably under the regulation
 of economic reforms initiated in 1991 by the then Finance Minister and
present Prime minister Dr. Manmohan Singh. No doubt it would have been
incomplete without the overhaul of Indian Banking System.

 Then all of a sudden focus shifted towards improving quality of
 assets and better risk management. The Narasimhan committee
 reports (First report) recommendations are the basis for initiation of
the process, which is still continuing. The committee has recommended
 the enactment of a new legislation for securitisation and empowering banks
 and financial institution to take possession of the securities and do sell them
 without the intervention of the court.

The Narasimham Committee Report



the Narasimham Committee report  is without doubt a
major path- breaking piece of work and deserves
 the support of all who yearn for a more rational and effective banking
system in this country. In order to have the proper understanding of NPA
menace, it is important to have a brief idea of growth and structural changes
 that have taken place in the banking sector.

The growth of the banking system can be assessed in five phases:-
1) Preliminary Phase(series of birth and death of banks)
2) Business Phase(period between 1949- 19 69)
 3) Branching Out Phase(period when commercial banks got nationalised)
4) Consolidated phase(weaknesses and defects were identified)
 5) Reforms and Strengthening Phase(1991 to till date) Indian Banking Industry Saddled with High NPAs:

 Reasons:
The liberalization policies launched in 1991 opened
the doors to the entrepreneurs to setup industries and business,
 which are largely financed by loans from the Indian banking systems.

 Business firms and companies fail to pay the principal amount as well
as the interest amount (Bad Loan) . In the global economy prevailing today,
the vulnerability of Indian businesses has increased.

A culture change is crept in where repayment of bank loans
 is no longer assured. A constant follow up action and vigil are to
 be exercised by the operating staff. Diversion of funds and willful
 default has become more common. As per a study published in
the RBI bulletin in July 1999, diversion of funds and willful default are
 found to be the major contributing factors for NPAs in public and private
sector banks.

 Today, the situation looks optimistic with the industry succeeding
 in overcoming the hurdles faced earlier. The timely restructuring and
rehabilitation measures have helped to overcome setbacks and hiccups
 without seriously jeopardizing their future. The greater transparency and
stricter corporate governance methods have significantly raise the credibility
 of the corporate sector. The attrition rate in corporate sector has come down.

 The challenges before the banks in India today are the raising NPAs in the
 retail sector, propelled by high consumerism and lowering of moral standards.

Other Factors:
The problem that India faces is not lack of prudential norms but the legal
impediments and time consuming nature of asset disposal process ,
 ‘postponement’ of the problem in order to report high earnings and to
 some extent manipulation of by the debtor using political influence.

Most of the banks in India are into this malpractices and fraudulent acts.
 In the process of earning high returns on their investment by the above
stated method, the banks become bankrupt or penniless.
 A vicious effect of the slow legal process is that banks are shying
away from risks by investing a greater than required proportion of their
 assets in the form of sovereign debt paper.

The worst part is that the NPA of a private enterprise is
 both financially and politically undesirable.

 Earlier bankruptcy Law favored borrowers and law courts
were not reliable vehicles. But the circumstances have changed.
Laws were passed allowing the creation of asset management companies,
foreign equity participation in securitisation and asset backed securitization.

 Impact of NPAs on Banking Operations:

The efficiency of a bank is not reflected only
 by the size of its balance sheet but also the
level of return on its assets. The NPAs do not
 generate interest income for banks but at the same
time banks are required to provide provisions for NPAs
 from their current profits.

The NPAs have deliterious impact in the interest income on the bank,
bank profitability because of the providing of the doubtful debts, return
on investment of course.

NPAs also disturb the Capital Adequacy Ratio (CAV)
and economic value addition (EVR) of the banks.

 It is due to above factors, the public sector banks
are faced with bulging NPAs which results in lower
 income and higher provisioning for doubtful debts and
it will make a dent in their profit margin.

In this context of crippling effect on banks operation
 the slew asset quality is placed as one of the most
 important parameters in the measurement of banks
 performance under the Camel’s supervisory rating system
of RBI. Whether trading of NPA between Banks illegal or not:
 The word ‘trading’ here means purchasing or selling of NPAs
 between banks. So assignment or trading falls under the guidelines
of Banking Regulation Act (BRA) which makes it legal .

But the Gujarat High court has recently held that the buying
 and selling of non performing assets is illegal.

The court has ruled that such an activity is not a part of “banking activity”
as contemplated under the Banking Regulation Act, 1949.

The court held that “Interse transfer of NPAs by banks is illegal
 and not a part of banking activity under the BR Act.

Trading in debts is a speculative form of transaction that is not
 permissible activity and thus, cannot be a part of the business of a
 banking system” The ruling had an impact of sending shockwaves through
 the backbone of Indian economy and came under the greater scrutiny
 in academic circles too.

 But the judgment is yet to stand the Supreme test
 of judiciary scrutiny as the aggrieved Banks and concerned
regulatory bodies (RBI and Indian Bank Association) have challenged
 the decision before the Supreme Court. In the interim, the legality of
 loan purchases is under cloud till now. I feel the recent pronouncement
 of the Gujarat High Court has misinterpreted the term ‘debt’ from legal as
 well as accounting point of view. A loan item or the borrower is an asset of
a bank and not a debt. Thus, de-facto the assignment of loan (good or bad)
 amounts to transfer of asset and not debt.

Even RBI considers interse NPA assignment between banks
to be a significant tool for resolving the issue of Non Performing
Assets and in the interest of Banking policy .

The decision given by the Honorable Courts in the cases
that have been cited below (footnote16) were in favor of “assignment of NPAs
between banks.

Measures to control NPAs menace:
 A lasting solution to the problem of NPAs can be achieved
only with proper credit assessment and risk management
mechanism. It is necessary that the banking system is equipped
 with prudential norms to minimize if not completely avoid the problem
 of credit risk.

 Effective management of NPA rather than elimination is prudent.

All these issues gave the passage of evolution of the Securitisation
 and Reconstruction of Financial Assets and enforcement of
 Security Interest Act (SARFAESI), 2002 .

 It is a unique piece of legislation which has
 far reaching consequences. Securitisation
in India is still in a nascent stage but has potential
in areas like mortgage Backed securitisation.

 This act has a overriding power over the other
legislation.
SARFAESI ACT was promulgated
 to regulate the financial assets and enforcement of
 security interest and for matters connected therewith or
incidental thereto. The main purpose of this act is to enable the creditors
take possession of the secured assets and to deal with them without the
intervention of the court.


 No doubt this Act was challenged in various courts
 on ground that it was loaded heavily in favour of lenders,
 giving little chance to the borrowers to explain their views
 once recovery process is initiated under the legislation.

The major problem with the Indian banking system is that they
depend largely upon lending and investments.
The banks in the developed countries do not depend
 upon this income whereas 86 percent of income of Indian
 banks is accounted from interest and the rest of the income
 is fee based. The banker can earn sufficient net margin by investing
 in safer securities though not at high rate of interest.
It facilitates for limiting of high level of NPAs gradually.

It is possible that average yield on loans and advances net
 default provisions and services costs do not exceed the
 average yield on safety securities because of the absence of
 risk and service cost. The corporate debt restructuring is also
one of the methods suggested for the reduction of NPAs.


 Its objective is to ensure a timely and transparent mechanism
 for restructure of corporate debts of viable corporate entities
 affected by the contributing factors outside the purview of DRT
 and other legal proceedings for the benefit of concerned.
 The problem of non -performing loans created due to systematic
banking crisis world over has become acute.

Focused measures to help the banking system to realise its NPAs
has resulted into the creation of specialised bodies called Asset
Management Companies which in India have been named Asset
 Reconstruction Companies (ARC’s)

The main objective of ARCs is to act as
1) A agent for any bank or financial institution for the purpose
 of recovering their dues from the borrowers.
 2) A manager of the borrowers’ asset taken over by banks or financial institution.
3) The receiver of properties of any bank or financial institution.
4) There have been instances of banks extending credit to doubtful debtors
 (who deliberately default on debt) and getting kickbacks for the same.
Ineffective Legal mechanisms and inadequate internal control
mechanisms have made this problem grow – quick action has
to be taken on both counts so that both the defaulters and the
 authorising officer are punished heavily. Without this, all the
mechanisms suggested above may prove to be ineffective.

 Conclusion

The contaminated portfolio is definitely a bane for any bank.
 It puts severe dent on the liquidity and profitability of the bank
where it is out of proportion.

It is needless to mention, that a lasting
solution to the problem of NPAs can be achieved only with proper credit
 assessment and risk management mechanism. It is necessary that the
banking system is to be equipped with prudential norms to minimize if not
 completely to avoid the problem of NPAs.

The onus for containing the factors
 leading to NPAs rests with banks themselves. This will necessitates organizational
restructuring, improvement in the managerial efficiency and skill up gradation for proper
assessment of credit worthiness

It is better to avoid NPAs at the nascent stage of credit
consideration by putting in place of rigorous and
appropriate credit appraisal mechanisms.

Debt Recovery and debt Management in India

 

Until the advent of the collection of debt management,
debt recovery in India was never treated as a skilled
worker and has always needed, as one of the tasks
that the legal services of banks and financial institutions are well off.

The legal department of a typical organization went to
work as a set of as strictly a legal matter and not an
increase in revenue. Litigation is the only known tool
for recovery and any other instrument or usedused by the industry.

Litigation as a measure of recovery has always had its
limits because of lengthy court proceedingsand liquidation
of the legal system in India is criticized. In addition, foreign
companies have introduced the concept of banking specialized collections.

Debt Collection Services, which is one of the many services
that are started, outsourced to specialist agencies.
Collection of reforms was very humble origins as a specialist and only qualifiedService.


But over time, with the emergence of India as a destination for
global outsourcing of domestic firms also outsourcing as a
business tool effectively. With today's result, which plays
the third part of the field of debt collection an important
role in the Indian economy.

The industry employs hundreds of thousands of Indians,
as a group of professionals that serve many industries,
banks, suppliers of telecommunications services for insurance
companies.Typically, only small recoveries, assigned by
unpaid bills by customers for collection agencies.

Not only the activity of harvesting crop as a direct source
of employment for thousands of people, but their contribution
to the economy is stronger, it helps to infuse money into the
economy that would not otherwise obtain -.
The economic benefits of debt on the Third party
collection. Citibank is the pioneer in introducing
the thirdTechniques for detection of parties in India.


The coverage of the needs of the sector in India has also
experienced strong growth this year by higher funding costs,
higher inflation and a weakening global economy forces
businesses and individuals by various difficulties.
The underlying debt has gone through the roof and
banks, loans and organizations increasingly bad on their books.

If a High Street bank, credit card lender or mobile
phone company, an increasing numbercontact the debt
collection company in an increasingly difficult.

The remittance industry in India is growing rapidly
and is without doubt the growing point.
The credit card has been increased up to
87% at 6.114 billion U.S. dollars U.S. per
year, from USD 2.844 million in the prior
year period. The Reserve Bank of India (RBI),
which regulates the banking sector of the country,
encouraging banks bad loans from their books
faster transmission becauseHolding more capital
in risky assets in May by default.

INDUSTRY COLLECTION – No Script 

 
Reforms collection has its own inherent weakness
due to the nature of this activity is regulated in this country
is primitive.

Are people who work in the field, not trained in both
social skills and legal knowledge.

Be regulated, the procedures are standardized and there are no
specific controls in the industry and balances. Another issue
is consideredInstrument of last resort for recovery.
But the industry has been manipulating the legal system
to their advantage by judges as agents of collection costs.

We see that large companies with large amounts of revenue
tacit understanding with the local judges on the lower level.
Because of the small minority of judges in criminal wrinkles
default calendar only printed and recorded Sponsored debtor
to pay the taxes. slow and prolonged civil warThe exploitation
of the judicial process has been insured in this age of instant
results when earnings targets are the most sacrosanct.

In a highly rigorous and cut his throat, the pressure on banks
to maintain their books of accounts in good health so
aggressive in nature and extra-legal methods that are used for quick access.

Government / RBI intervention 

Recovery of debts in the past, a lot of margin,
and it was not uncommon for collectors to annoy,
harass or humiliate debtors bearextrajudicial measures.
Intervening in the absence of a judicial system had to follow
to establish guidelines for the industry.

Following intervention by the judiciary, has
been awakened to the need for the RBI to
regulate debt collection agencies to rebel and
follow their guidelines for the banking sector.


The guidelines set the RBI applicable to banks
that have been assigned to collection agencies.
Banks, in turn, through their contracts withCollection
agencies, so that he, the RBI guidelines.

According to RBI guidelines, it is forbidden
to violence and damage to the debtor, the
obscene language or repeatedly use the
telephone to harass debtors threaten.
Moreover, the debt collector may not use
the property or garnish a consumer or a
salary, without resorting to judicial proceedings.
Here are some of the key aspects of the investigation.

These rules are formalized by the bank top in India – RBI. 

1.DSA / DMA / Recovery Agents of at least 100 hours of training.

2. Recovery agents should be communicated to the
borrower only call the phone numbers for the borrower.

3. Each bank should establish a mechanism for
submitting complaints by borrowers in connection
with the recovery process have been addressed.

4. Banks are asked to ensure that contracts with recovery agents do not
Encourage the adoption of uncivilized behavior,
questionable or illegal and the process of recovery.

5. Banks are obliged tostrictly in accordance with the
codes for the collection of contributions.
Guided by the draft guidelines issued by banks,
participants said recovery agents, banks, borrower
s the details of a recovery agent for the purpose of
document information, when sending files to the standard –
the debt collectors.

The Reserve Bank of India has also
introduced a temporary ban (or even a permanent ban
in case of persistent abusive practices) for the recording
of recovery agents of banks, which were sanctionedby
a High Court / Supreme Court imposed or pursued
against directors and officers against abusive practices
by their recovery agents.

An operational circular in this regard was signed November 15, 2007 issued.

Other laws 

Furthermore, the bank debt of activities
of collection is not the responsibility of the
regulator. There are no documents of any
licensing or regulatory authorities for further
collection in India will be achieved.

The existing guidelines for banksare inadequate
because they are too focused on the problem of
harassment of debtors and rules do not regulate
the sector as such. The government is aware of
the need is to become a special legal mechanism
for recovery of debt a big problem for the banking
sector as a whole.

Each bank has with the non-payment of bills
which are not known to the termination of accounts
(NPA) in the language of Bank of India.

The problem has grown enormously andthreatens
the economy. The establishment of courts for
recovery of debt in 1993 was a first step to facilitate
rapid recovery of the banks.

The intention behind the creation of this tribunal
is to ensure that the banking sector has its own
healing mechanism, which is part of the legal system,
but at the same time, the banking sector out.

Bank debt of more than $ 22,727 could be recovered through the courts.

However, for a while, he realized thatThis
new mechanism has the desired result because
the recovery is still slow and the cut due to the
workload, became the Court, like any other court.

The purpose of rejection of a track was fast and effective recovery.
Bank debt remains a serious problem to solve, because they
affect the entire economy. The government felt the need for a
mechanism that a small part from the judge, to make
recoverythe legal system could be reformed overnight.
So, rather than the reform of the judicial process
did not think the government, intelligent and has a
law that the court hearing and the power of banks
to propose minimizes the special powers that the
rate of recovery could be affected.
The government has found a new law Scrutinizer
and reconstruction of financial assets and enforcement
of interest to the Security Act of 2002 (Act SARFAESI),
where, as banksallows security by the borrower was to
liquidate, collect its receivables.

This law also paved the way for the creation of enterprises
in the reconstruction of the debtor's assets include the safety
again. These organisms are therefore another form of
debt collection agencies, debt, have institutionalized.

The need for exchange of information between the
banking sector was also felt in order for the industry
for the good of others. How Credit Information
Company(Regulation) Act was adopted in 2005.
INDIAN law and the process of collection

The Indian legal system is to ensure absolutely fair and
equitable for the party. There are legal means to collect
debts if the debtor agrees to pay under normal conditions.
To sue the creditor for his recovery.

The bad debts written contract could be recovered
under an accelerated pace. If the debtor is a company
and its creditorsLawyers can the 'Company Court apply
to the liquidation of the company for failure to pay a
substantial amount of debt. A summary trial is another matter.
The process will take time, from May to 1 to 2 years.

The test is properly recorded and produced in court if necessary.
There is also the agreement of the complaint must be filed no later than.

U.S. OUTSOURCING OUTLOOK 

India has attracted many technology jobs in recent years
by Western countries, particularly the United States.
Now,about to become a center in another area of
outsourcing – debt. According to the report, industry,
units of General Electric, Citigroup used, HSBC Holdings
and American Express, its India-based staff to pursue  
the debt and credit cards by calling the non-paying
the mortgage.

Debt collection agency of the United States are the
most recent to start your job outsourcing in India
and with the results of experts trained very satisfied,
but persistent India.After the sale of debt insurance
and credit card is a growing business for outsourcing
companies at a time of economic slowdown in the
United States as consumers struggle to pay for their purchases.

The recovery is of vital importance, and economic
growth in the United States. There are over 2.5 billion
dollars in consumer debt. Consequently, the library
industry for more than a third of a billion contacts with
consumers each year. Recently this year, more than
39.3 millionBillion debt was issued to the creditors.


The Indians have the advantage that the wages and
other costs, significantly reducing the costs of debt recovery.
Recovery agents in India costs only one quarter of the price
of their American and European counterparts, and are often
better the task. Many of these services from Indian companies
24 hours. Business India collection of debts under the
strict rules on the activities of America and / or European markets.

ABSTRACT 

India has along path through a collection service in the field
of aging. The collection activities must be regulated and
legal powers to be an effective instrument. There is already
an awareness in the country that recovery depends on the
court an inefficient method of collection.

Creation of active reconstruction and securitization
businesses SARFARESI under the law is a step in
the right direction to locate the recovery of debts, as
an independent and specializedFeature.

Although some progress has been made in bank
debt, but much of the debt is not a bank professionally
managed and regulated third party provider of access
to the library. N. bank debts were largely unsecured,
which makes it even more difficult.

There are big companies and business
houses are in a recovery agents are interested in,
without an appeal for the safety of high-value goods.
Lawyers can fill this gap by debt recovery servicesno
bank debt. Indian law does not allow contingency fees,
which makes the business less profitable.

India is ready to take advantage of foreign experience
to take the know-how and ideas to create a viable
and to increase its pace to the overall situation.
This requirement is now internationally because
of its global ambitions of India, that India should
feel recognized methods and models.

The multinationals have a standard operating
system for smooth transactions.
Actual debtEuropean industry to make
the trust only in companies that do business
with Indian companies.

Library professionals are required to
have an efficient system that reduces
reliance on a court with the support of the rest.