No borrower can claim benefit of One Time Settlement Scheme as a right; Can’t encourage dishonest borrowers: SC

Supreme Court: In a major relief to Banks, the bench of MR Shah* and BV Nagarathna, JJ has held that no borrower can, as a matter of right, pray for grant of benefit of One Time Settlement Scheme (OTS Scheme) as,

“If it is held that the borrower can still, as a matter of right, pray for benefit under the OTS Scheme, in that case, it would be giving a premium to a dishonest borrower, who, despite the fact that he is able to make the payment and the fact that the bank is able to recover the entire loan amount even by selling the mortgaged/secured properties, either from the borrower and/or guarantor. This is because under the OTS Scheme a debtor has to pay a lesser amount than the actual amount due and payable under the loan account. Such cannot be the intention of the bank while offering OTS Scheme and that cannot be purpose of the Scheme which may encourage such a dishonesty.”

Factual Background

The original writ petitioner had obtained credit facility from the bank of about Rs. 1 crore. The said loan account with the Bank was categorised as “Non-Performing Asset, (NPA)”. The Bank also initiated proceedings under the provisions of the SARFAESI Act. These proceedings have remained pending for seven years.

There were two other loan accounts also which were being regularly serviced by the original writ petitioner, meaning thereby that the payment was regularised insofar as two other loan accounts are concerned. However, so far as the NPA is concerned, not a single amount was paid till an application for extending the benefit of OTS was submitted.

The Allahabad High Court had directed the Bank to positively consider the original writ petitioner’s application for OTS.

While passing the impugned judgment and order, the High Court, in response to the submissions on behalf of the Bank that, there are all possibilities of recovery of the loan amount and the efforts are being made to recover the amount by initiating proceedings under the SARFAESI Act and that the properties mortgaged can be auctioned, had observed that the proceedings under the SARFAESI Act have remained pending for seven years and the Bank has been unable to recover its dues and therefore the hope of recovery is illusory.

The bank had, hence, moved the Supreme Court.

Analysis

RBI Guidelines on OTS Scheme

As per the RBI guidelines, the grant of benefit of OTS Scheme cannot be prayed as a matter of right and the same is subject to fulfilling the eligibility criteria mentioned in the scheme. A wilful defaulter in repayment of loan and a person who has not paid even a single installment after taking the loan and will not be able to pay the loan will be considered in the category of “defaulter” and shall not be eligible for grant of benefit under the OTS Scheme. Similarly, a person whose account is declared as “NPA” shall also not be eligible.

Further, if there is possibility of recovery of the amount, either by initiating appropriate proceedings or by auctioning the property mortgaged and/or the properties given as a security either by the borrower and/or by guarantor, the application submitted by the borrower for grant of benefit under the OTS Scheme can be rejected.

Benefit of OTS Scheme not a right

No borrower can, as a matter of right, pray for grant of benefit of One Time Settlement Scheme.

In a given case, it may happen that a person would borrow a huge amount, for example Rs. 100 crores. After availing the loan, he may deliberately not pay any amount towards installments, though able to make the payment. He would wait for the OTS Scheme and then pray for grant of benefit under the OTS Scheme under which, always a lesser amount than the amount due and payable under the loan account will have to be paid.

No bank can be compelled to accept a lesser amount under the OTS Scheme despite the fact that the Bank is able to recover the entire loan amount by auctioning the secured property/mortgaged property. When the loan is disbursed by the bank and the outstanding amount is due and payable to the bank, it will always take a conscious decision in the interest of the bank and in its commercial wisdom.

Issue a writ of mandamus directing the Bank to positively consider the grant of benefit under the OTS Scheme

No writ of mandamus can be issued by the High Court in exercise of powers under Article 226 of the Constitution of India, directing a financial institution/bank to positively grant the benefit of OTS to a borrower. The grant of benefit under the OTS is always subject to the eligibility criteria mentioned under the OTS Scheme and the guidelines issued from time to time. If the bank/financial institution is of the opinion that the loanee has the capacity to make the payment and/or that the bank/financial institution is able to recover the entire loan amount even by auctioning the mortgaged property/secured property, either from the loanee and/or guarantor, the bank would be justified in refusing to grant the benefit under the OTS Scheme. Ultimately, such a decision should be left to the commercial wisdom of the bank whose amount is involved and it is always to be presumed that the financial institution/bank shall take a prudent decision whether to grant the benefit or not under the OTS Scheme, having regard to the public interest involved and having regard to the factors which are narrated hereinabove.

“If a prayer is entertained on the part of the defaulting unit/person to compel or direct the financial corporation/bank to enter into a one-time settlement on the terms proposed by it/him, then every defaulting unit/person which/who is capable of paying its/his dues as per the terms of the agreement entered into by it/him would like to get one time settlement in its/his favour. Who would not like to get his liability reduced and pay lesser amount than the amount he/she is liable to pay under the loan account?”

Ruling on facts

The original writ petitioner and her husband were making the payments regularly in two other loan accounts and those accounts are regularised. Despite having the capacity to make the payment even with respect to the present loan account, not a single amount/installment had been paid in the present loan account for which original petitioner was praying for the benefit under the OTS Scheme.

Further, merely because the proceedings under the SARFAESI Act have remained pending for seven years, the Bank cannot be held responsible for the same. No fault of the bank can be found. What was required to be considered is a conscious decision by the Bank that the Bank will be able to recover the entire loan amount by auctioning the mortgaged property and a due application of mind by the Bank that there are all possibilities to recover the entire loan amount, instead of granting the benefit under the OTS Scheme and to recover a lesser amount.

Hence, the High Court, had materially erred and had exceeded in its jurisdiction in issuing a writ of mandamus in exercise of its powers under Article 226 of the Constitution of India by directing the appellant-Bank to positively consider/grant the benefit of OTS to the original writ petitioner who was not just an NPA account holder but also a willful defaulter.

[Bijnor Urban Cooperative Bank Limited v. Meenal Agarwal, 2021 SCC OnLine SC 1255, decided on 15.12.2021]


Counsels

For Bank: Senior Advocate Meenakshi Arora,

For original writ petitioner: Senior Advocate V.K. Shukla


*Judgment by: Justice MR Shah

Know Thy Judge | Justice M. R. Shah

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