Case BriefsCOVID 19Supreme Court

Supreme Court: In an important verdict concerning the Small Scale Industries, particularly the MSMEs, facing the financial strain due to the Corona Virus Pandemic, the 3-judge bench of Ashok Bhushan, R. Subhash Reddy and MR Shah*, JJ has held that there shall not be any charge of interest on interest/compound interest/penal interest from any of the borrowers who availed RBI’s loan moratorium scheme for the period between March 1, 2020 till August 31, 2020 during the COVID-19 lockdown.

The Court held that whatever the amount is recovered by way of interest on interest/compound interest/penal interest for the period during the moratorium, the same shall be refunded and be adjusted/given credit in the next instalment of the loan account.

The Court, however, refused to extend the moratorium period and also refused to grant the relief of total waiver of interest. 

Background

The Court was hearing a batch of petitions challenging the Covid-19 Regulatory Package notified by the RBI vide notification dated 27.03.2020 seeking total waiver of interest being charged on the loan amount during the moratorium period and also further extension of the moratorium period. It was also prayed before the Court that the relief packages which are offered by the UOI/RBI/Bankers/Lenders were not sufficient and some better and/or more reliefs should be offered.

However, on 23.10.2020 , the Central Government came out with a policy decision by which it is decided not to charge the interest on interest on the loans up to Rs. 2 crores.  However, such relief was restricted to these 8 categories.

It was Central Government’s case that if the Government were to consider waiver of interest on all the loans and advances to all classes and categories of borrowers corresponding to the six-month period for which the moratorium was made available under the relevant RBI circulars, the estimated amount is more than Rs. 6 lakh crores. “If the banks were to bear this burden, it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark over their very survival.” This was one of the main reasons why waiver of interest   was   not   even   contemplated and only payment of instalments was deferred.

After careful consideration and weighing all possible options, the Central Government decided to continue the tradition of handholding the small borrowers and, therefore, granted the relief of waiver of compound interest during the moratorium period, limited to the most vulnerable categories of borrowers.

Ruling 

Total Waiver of interest during moratorium period

The bankers/lenders have to pay the interest to the depositors and their liability to pay the interest on the deposits continue even during the moratorium period. They also have to bear the administrative expenses. Continue payment of interest to depositors is not only one of the most essential banking activities but it shall be a huge responsibility owed by the banks to crores and crores of small depositors, pensioners etc. surviving on the interest from their deposits. There may be several welfare funds schemes, category specific and sector specific which might be surviving and are implemented on the strength of the interest generated from their deposits. All such welfare funds would depend on the income generated from their deposits for the survival of their members.

“Therefore, to grant such a relief of total waiver of interest during the moratorium period would have a far-reaching financial implication in the economy of the country as well as the lenders/banks.”

Hence, when a conscious decision has been taken not to waive the interest during the moratorium period and a policy decision has been taken to give relief to the borrowers by deferring the payment of installments and so many other reliefs are offered by the RBI and thereafter by the bankers independently considering the Report submitted by Kamath Committee consisting of experts, the interference of the court is not called for.

Insufficient Relief packages

No   mandamus   can   be   issued   to   grant   some   more reliefs/packages. The court cannot interfere with the economic policy decisions on the ground that either they are not sufficient or efficacious and/or some more reliefs should have been granted. The Government might have their own priorities and the Government has to spend in various fields and in the present case like health, medicine, providing food etc.

Economic decisions are required to be taken keeping the larger economic scenario in mind and as such the Central Government has already given various reliefs and by providing various reliefs, they have already expanded huge financial burden. Further, the pandemic has caused stress to large and small businesses and the individuals who have lost jobs and livelihoods. By and large, everybody has suffered due to lockdown due to Covid-19 pandemic.

“No State or country can have unlimited resources to spend on any of its projects. That is why it only announces the financial reliefs/packages to the extent it is feasible.”

Extension of moratorium period

Extension of moratorium period is a policy decision.  Even otherwise, almost five months were available to eligible borrowers when circular dated 6.8.2020 was notified providing for a separate resolution mechanism for Covid19 related stressed assets.  Therefore, sufficient time was given to invoke the resolution mechanism.

Restriction of not charging interest on interest with respect to the loans up to Rs. 2 crores only for a few categories

In absence of any justification shown by the Government to restrict the relief of not charging interest on interest with respect to the loans up to Rs. 2 crores only and that too restricted to the aforesaid categories, the Court found such decision to be irrational.

It was also noted that the scheme dated 23.10.2020 granting relief/benefit of waiver of compound interest/interest on interest contains eligibility criteria and it provides that any borrower whose aggregate of all facilities with lending institution is more than Rs. 2 crores (sanctioned limit or outstanding amount) will not be eligible for ex-gratia payment under the said scheme.  Therefore, if the total exposure of the loan at the grant of the sanction is more than Rs. 2 crores, the borrower will be ineligible irrespective of the actual outstanding.

Giving an example, the Court explained

“if the borrower has been sanctioned a loan of Rs. 5 crores and has availed of the same, even though he might have repaid substantially bringing down the principal amount of less than Rs. 2 crores as on 29.02.2020, but because of the sanction of the loan amount of more than Rs. 2 crores, he will be ineligible. It also further provides that the outstanding amount should not be exceeded to Rs. 2 crores and for this purpose aggregate of all facilities with the lending institution will be reckoned.   Therefore, if a borrower, for example, MSME Category has availed and has outstanding of business loan of Rs. 1.99 crores and also has dues of its credit card of Rs. 1.10 lakhs, thereby making the aggregate to Rs. 2.10 crores, it stands ineligible. Therefore, the aforesaid conditions would be arbitrary and discriminatory.”

Further, the compound interest/interest on interest shall be chargeable on deliberate/willful default by the borrower to pay the installments due and payable. Therefore, it is in the nature of a penal interest.

By notification dated 27.03.2020, the Government has provided the deferment of the installments due and payable during the moratorium period.

“Once the payment of installment is deferred as per circular dated 27.03.2020, non-payment of the installment during the moratorium period cannot be said to be willful and therefore there is no justification to charge the interest on interest/compound interest/penal interest for the period during the moratorium.”

Therefore, there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium from any of the borrowers and whatever the amount is recovered by way of interest on interest/compound interest/penal interest for the period during the moratorium, the same shall be refunded and to be adjusted/given credit in the next instalment of the loan account.

[Small Scale Industries Manufacturers Association v. Union of India, 2021 SCC OnLine SC 246, decided on 23.03.2021]


*Judgment by: Justice MR Shah

Appearances before the Court by:

For Petitioners: Senior Advocate Ravindra Shrivastava, Dr. Abhishek Manu Singhvi, Kapil Sibbal

For Union of India: Solicitor General of India Tushar Mehta

For RBI: Senior Advocate V. Giri

For Indian Bank Association: Senior Advocate Harish Salve

For SBI: Senior Advocate Mukul Rohatgi

ALSO READ

COVID-19| Seeking waiver of interest on interest for loan during the moratorium period? SC asks Govt to implement decision to forego compound interest on these 8 categories

Hot Off The PressNews

Master Direction on Digital Payment Security Controls

The Master Direction provides necessary guidelines for the Regulated Entities (Scheduled Commercial Banks, Small Finance Banks, Payment Banks and Credit Card issuing NBFCs) to set up a robust governance structure and implement common minimum standards of security controls for digital payment products and services.

The guidelines are technology and platform agnostic and shall create an enhanced and enabling environment for customers to use digital payment products in a more safe and secure manner.

The Master Direction consolidates important control aspects broadly in the following areas viz., Governance and Management of Security Risks, Generic Security Controls, Application Security Life Cycle (ASLC), Authentication Framework, Fraud Risk Management, Reconciliation Mechanism, Customer Protection, Awareness and Grievance Redressal Mechanism, specific controls related to Internet Banking, Mobile Payments Application Security Controls and Card Payments Security.


Reserve Bank of India

[Press release dt. 18-02-2021]

Case BriefsSupreme Court

Supreme Court: In a case where United Bank of India inadvertently broke the Appellant’s locker, without any just or reasonable cause, even though he had already cleared his pending dues, the bench of MM Shantanagoudar* and Vineet Sarana, JJ Imposed costs of Rs. 5,00,000/­ on the Bank to be paid to the Appellant as compensation. The said is to be deducted from the salary of the erring officers, if they are still in service and if they have already retired, the amount of costs should be paid by the Bank. Additionally, the Appellant shall be paid Rs. 1,00,000/- as litigation expense.

Noticing that the customer is completely at the mercy of the bank, which is the more resourceful party, for the protection of their assets, the Court said that in such a situation, the banks cannot wash off their hands and claim that they bear no liability towards their customers for the operation of the locker.

“The very purpose for which the customer avails of the locker hiring facility is so that they may rest assured that their assets are being properly taken care of. Such actions of the banks would not only violate the relevant provisions of the Consumer Protection Act, but also damage investor confidence and harm our reputation as an emerging economy.”

The Court also issued various directions to the Banks. (See below)

Background

Bank inadvertently broke the Appellant’s locker, without any just or reasonable cause, even though he had already cleared his pending dues. Moreover, the Appellant was not given any notice prior to such tampering with the locker. He remained in the dark for almost a year before he visited the bank for withdrawing his valuables and enquired about the status of the locker. Irrespective of the valuation of the ornaments deposited by the Appellant, he had not committed any fault so far as operation of the locker was concerned. Thus, the breaking open of the locker was in blatant disregard to the responsibilities that the bank owed to the customer as a service provider. The alleged loss of goods did not result from any force majeure conditions, or acts of third parties, but from the gross negligence of the bank itself. It is case of gross deficiency in service on the part of the bank.

Obligations of Banks while allotting and operating the lockers

It was noticed that each bank is following its own set of procedures and there is no uniformity in the rules and it seems that the banks are under the mistaken impression that not having knowledge of the contents of the locker exempts them from liability for failing to secure the lockers in themselves as well.

“In as much as we are the highest Court of the country, we cannot allow the litigation between the bank and locker holders to continue in this vein. This will lead to a state of anarchy wherein the banks will routinely commit lapses in proper management of the lockers, leaving it to the hapless customers to bear the costs.”

Hence, it is imperative to lay down certain principles which will ensure that the banks follow due diligence in operating their locker facilities, until the issuance of comprehensive guidelines in this regard.

Noticing that irrespective of the value of the articles placed inside the locker, the bank is under a separate obligation to ensure that proper procedures are followed while allotting and operating the lockers, the Court enumerated a list of obligations:

(a)  Maintenance of a locker register and locker key register.

(b) The locker register shall be consistently updated in case of any change in allotment.

(c)  The bank shall notify the original locker holder prior to any changes in the allotment of the locker, and give them reasonable opportunity to withdraw the articles deposited by them if they so wish.

(d) Banks may consider utilizing appropriate technologies, such as blockchain technology which is meant for creating digital ledger for this purpose.

(e) The custodian of the bank shall additionally maintain a record of access to the lockers, containing details of all the parties who have accessed the lockers and the date and time on which they were opened and closed.

(f) The bank employees are also obligated to check whether the lockers are properly closed on a regular basis. If the same is not done, the locker must be immediately   closed   and   the   locker   holder   shall   be promptly   intimated   so   that   they   may   verify   any resulting discrepancy in the contents of the locker.

(g)  The concerned staff shall also check that the keys to the locker are in proper condition.

(h) In case the lockers are being operated through an electronic system, the bank shall take   reasonable steps to ensure that the system is protected against hacking or any breach of security.

(i) The customers’ personal data, including   their biometric data, cannot be shared with third parties without their consent. The relevant rules under the Information Technology Act, 2000 will be applicable in this regard.

(j)  The bank has the power to break open the locker only in accordance with the relevant laws and RBI regulations, if any. Breaking open of the locker in a manner other than that prescribed under law is an illegal act which amounts to gross deficiency of service on the part of the bank as a service provider.

(k)  Due notice in writing shall be given to the locker holder at a reasonable time prior to the breaking open of the locker. Moreover, the locker shall be broken open only in the presence of authorized officials and an independent witness after giving due notice to the locker holder. The   bank must prepare a detailed inventory of any articles found inside the locker, after the locker is opened, and make a separate entry in the locker register, before returning them to the locker holder. The locker holder’s signature should be obtained upon the receipt of such inventory so as to avoid any dispute in the future.

(l) The bank must undertake proper verification procedures to ensure that no unauthorized party gains access to the locker. In case the locker remains inoperative for a long period of time, and the locker holder cannot be located, the banks shall transfer the contents of the locker to their nominees/legal heirs or dispose of the articles in a transparent manner, in accordance with the directions issued by the RBI in this regard.

(m) The banks shall also take necessary steps to ensure that the space in which the locker facility is located is adequately guarded at all times.

(n) A copy of the locker hiring agreement, containing the relevant terms and conditions, shall be given to the customer at the time of allotment of the locker so that they are intimated of their rights and responsibilities.

(o) The bank cannot contract out of the minimum standard of care with respect to maintaining the safety of the lockers as outlined supra.

 

Direction to RBI

It is necessary that the RBI lays down comprehensive directions mandating the steps to be taken by banks with respect to locker facility/safe deposit facility management. The banks should not have the liberty to impose unilateral and unfair terms on the consumers.

Hence, the RBI was directed to issue suitable rules or regulations as aforesaid within six months.

“Until such Rules are issued, the principles stated in this judgment, in general and at para in particular, shall remain binding upon the banks which are providing locker or safe deposit facilities.”

RBI may also issue suitable rules with respect to the responsibility owed by banks for any loss or damage to the contents of the lockers, so that the controversy on this issue is clarified as well.

[Amitabha Dasgupta v. United Bank of India, 2021 SCC OnLine SC 124, decided on 19.02.2021]


*Judgment by: Justice MM shantangoudar

Case BriefsSupreme Court

Supreme Court: In a breather to customers in the case relating to waiver of interest on loan during the moratorium period, the 3-judge bench of Ashok Bhushan*, R. Subhash Reddy and MR Shah, JJ has directed that all steps to implement the decision dated 23.10.2020 of the Government of India, Ministry of Finance be taken so that benefit to the eight categories contemplated in the affidavit can be extended.

The affidavit dated 23.10.2020, states that

“ (…) the decision taken by the Central Government for granting various reliefs for the COVID-19 pandemic for benefit of waiver of interest upto Rs.2 Crores in eight categories has been approved by the Union Cabinet in its meeting dated 21.10.2020 and Ministry of Finance has issued directions dated 23.10.2020 on the subject, which has been brought on record alongwith the affidavit.”

The eight categories are:

(i) MSME loans

(ii) Education loans

(iii) Housing loans

(iv) Consumer durable loans

(v) Credit card dues

(vi) Automobile loans

(vii) Personal loans to professionals

(viii) Consumption loans up

Solicitor General Tushar Mehta submitted before the Court that the Central Government is fully conscious of the difficulties faced by the various sectors and the stakeholders of various sectors and the Finance Ministry, after the outbreak of COVID-19, has taken several measures of reliefs dealing with the potential problems faced by several sectors and in several spheres of all financial worlds.

It was further highlighted that in pursuance of circular dated 23.10.2020,

“… the State Bank of India has informed that as on 13.11.2020, as per provisional, unaudited information received so far from various lending institutions, such lending institutions have released ex-gratia amount of an aggregate exceeding Rs.4,300 Crores in over 13.12 Crore accounts of borrowers covered under the Scheme.”

The Court will continue to hear the matter on 02.12.2020.

[Gajendra Sharma v. Union of India, 2020 SCC OnLine SC 963, decided on 27.11.2020]


*Justice Ashok Bhushan has penned this judgment

For petitioner: Senior Advocate Rajiv Dutta

For RBI: Solicitor General Tushar Mehta, Senior Advocate V. Giri and Advocate Ramesh Babu M.R.

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of Ashok Bhushan, R. Subhash Reddy and MR Shah*, JJ had held that it is for the employer to determine and decide the relevancy and suitability of the qualifications for any post, not the Courts.

“Qualifications are prescribed keeping in view the need and interest of an Institution or an Industry or an establishment as the case may be. The Courts are not fit instruments to assess expediency or advisability or utility of such prescription of qualifications. However, at the same time, the employer cannot act arbitrarily or fancifully in prescribing qualifications for posts.”

In the present case, applications were invited by the appellant Bank for the post of Peon by publishing an advertisement in the local newspaper. The eligibility criteria mentioned in the said advertisement was that a candidate should have passed 12th class or its equivalent with basic reading/writing knowledge of English. It specifically provided that a candidate should not be a Graduate as on 01.01.2016

The respondent herein – original writ petitioner, based on the information provided by him in his application, was appointed. While scrutiny of the documents was going on, the appellant Bank came to know about a graduate certificate showing that the respondent was a graduate since 2014.  Thus, it was noticed and found that he was not eligible as per the advertisement and the Circulars and that the respondent deliberately, wilfully and intentionally suppressed the fact that he was a graduate. Therefore, his candidature was cancelled and he was not allowed to join the bank in subordinate cadre. The High Court of Orissa, however, directed the appellant Bank to allow the respondent to discharge his duties as a Peon as per the appointment order.

The Bank submitted that considering the nature of the post – Peon/subordinate cadre, a conscious decision was taken by it that a candidate having the qualification of graduation shall not be eligible and the candidate who passed in 12th standard or its equivalent with basic reading/writing knowledge of English shall only be eligible. Hence, unless it is found to be most arbitrary, the same cannot be the subject-matter of a judicial review.

The Court held that prescribing the eligibility criteria/educational qualification that a graduate candidate shall not be eligible and the candidate must have passed 12th standard is justified and it is a conscious decision taken by the Bank which is in force since 2008. Therefore, the High Court has clearly erred in directing the appellant Bank to allow the respondent-original writ petitioner to discharge his duties as a Peon, though he as such was not eligible as per the eligibility criteria/educational qualification mentioned in the advertisement.

Considering the facts and circumstances of the case at hand, the Court noticed that in the application, the respondent did not disclose that he is a graduate from 2014 and only mentioned his qualification as 12th pass. Therefore, the respondent deliberately, wilfully and intentionally suppressed the fact that he was a graduate. Had it been known to the bank that he was a graduate, he would not have at all been considered for selection as a Peon in the bank.

The Court further held that once having participated in the recruitment process as per the advertisement, thereafter it is not open for him to contend that acquisition of higher qualification cannot be a disqualification and that too when he never challenged the eligibility criteria/educational qualification mentioned in the advertisement.

[Chief Manager, Punjab National Bank v. Anit Kumar Das, 2020 SCC OnLine SC 897, decided on 03.11.2020]


*Justice MR Shah has penned this judgment 

Hot Off The PressNews

There have been several media reports alluding to steep increase in service charges by certain Public Sector Banks (PSBs).  In this context, the factual position is as follows:

  • Basic Savings Bank Deposit (BSBD) accounts including Jan Dhan accounts – No service charge is applicable on the 60.04 crore BSBD accounts, including 41.13 crore Jan Dhan accounts opened by the poor and unbanked segments of society, for the free services prescribed by RBI.
  • Regular Savings accounts, Current Accounts, Cash credit accounts & Overdraft accounts:  In this regard, while the charges have not been increased, Bank of Baroda had made certain changes w.e.f. 1st November, 2020, with regard to the number of free cash deposits and withdrawals per month.  The number of free cash deposits and withdrawals, have been reduced from 5 each per month to 3 each per month, with no change in the charges for transactions in excess of these free transactions.

Bank of Baroda has since informed that in the light of the current COVID related situation, they have decided to withdraw the changes.  Further, no other PSB has increased such charges recently.

Although, as per RBI guidelines, all banks, including PSBs, are permitted to levy charges for their services in a fair, transparent and non-discriminatory manner, based upon costs involved, other PSBs have also intimated that they do not propose to raise bank charges in the near future in view of the COVID pandemic.


Ministry of Finance

[Press Release dt. 03-11-2020]

[Source: PIB]

Case BriefsHigh Courts

Delhi High Court: A Division Bench of Hima Kohli and Subramonium Prasad, JJ., considered the following question:

Whether a bank/financial institution can institute or continue with proceedings against a guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), when proceedings under the Insolvency and Bankruptcy Code 2016 (IB Code) have been initiated against the principal borrower and the same are pending adjudication?

Respondent 4 was the principal borrower in the present case who had obtained loans from the State Bank of India. Guarantor was the wife of the promoter of the principal borrower. Further, it has been stated that the bank filed an insolvency petition against the principal borrower under the provisions of the IB Code before the NCLT, Delhi.

At the time of pendency of the insolvency proceedings against the principal borrower, bank issued a notice under Section 13(2) of the SARFAESI Act to the petitioner and another notice under Section 13(4) of the SARFAESI Act was also issued. Both the notices were challenged by the petitioner.

The above-stated notices were challenged before Debts Recovery Tribunal but were later withdrawn in light of negotiation talks between the Bank and the Principal Borrower.

Petitioner alleged that without issuing a Notice under Section 1(4) of SARFAESI Act, the Bank issued  Sale Notice under Rule 8 (6) of Security Interest (Enforcement) Rules for sale of her residential house.

In the instant matter, the prime question for consideration was confined to the action of the Bank of initiating proceedings against the petitioner under the SARFAESI Act when insolvency proceedings have been initiated against the Principal Borrower under the IB Code and the same are pending before the NCLT.

Analysis & Decision

Bench referred to the relevant provisions, Sections 14 and 31 of the IB Code and Section 128 of the Contract Act.

Section 14 of the IB code related to Moratorium, Section 31 of the IB Code refers to the approval of the resolution plan and Section 128 of the Contract Act provides the Surety’s liability.

Section 128 of the Contract Act provides that the liability of a Guarantor is coextensive with that of the Principal Debtor.

Bench cited the decision of Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala, (2009) 9 SCC 478.

Court held that since the liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative, it cannot be said that proceedings in the NCLT against the principal debtor can be a bar to institution or continuation of proceedings against the guarantor under the SARFAESI Act.

Bench stated that the question raised with regard to whether the bank can proceed against a guarantor even after initiation of proceedings under the IB Code also stands settled and is squarely covered by the Supreme Court’s decision in SBI v. V. Ramakrishan, (2018) 17 SCC 394.

The above-cited decision holds that Sections 14 and 31 of the IB Code do not bar initiation and continuation of the SARFAESI proceedings against the Guarantor.

View of the Supreme Court amply demonstrated that neither Section 14 nor Section 31 of the IB Code place any fetters on banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues.

Therefore, Court held that,

“…petitioner cannot escape her liability qua the respondent/Bank in such a manner. The liability of the principal borrower and the Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower.”

In view of the above, no merit was found in the petition and hence was dismissed. [Kiran Gupta v. State Bank of India, 2020 SCC OnLine Del 1390, decided on 02-11-2020]

Legislation UpdatesStatutes/Bills/Ordinances

The Banking Regulation (Amendment) Bill, 2020

Which Act will the said bill amend?

The Banking Regulation (Amendment) Bill, 2020 will amend the Banking Regulation Act, 1949 and the Act will be called the Banking Regulation (Amendment) Act, 2020.

Why were amendments needed under the Banking Regulation Act, 1949?

Certain amendments were considered necessary in the said Act to provide for better management and proper regulation of co-operative banks and to ensure that the affairs of the co-operative banks are conducted in a manner that protects the interests of the depositors, by increasing professionalism, enabling access to capital, improving governance and ensuring sound banking through the Reserve Bank of India.

Further amendments were proposed to be made in Section 45 of the Act to enable the Reserve Bank of India to make a scheme to protect the interests of the public, the banking system, depositors or to secure the banking company’s proper management, without first making an order of moratorium so as to avoid disruptions in the financial system

How did COVID-19 impact the economic situation?

As the economic situation arising from the COVID-19 pandemic had increased the stress in both co-operative banks and banking companies, there was an immediate need for legislation in this regard.

As Parliament was not in session, the Banking Regulation (Amendment) Ordinance, 2020 was promulgated by the President of India on the 26th day of June, 2020 under clause (1) of Article 123 of the Constitution.

Salient Features of the Bill:

(i) substitution of Section 3 to provide that the Act shall not apply to— (a) a primary agricultural credit society; or (b) a co-operative society whose primary object and principal business is providing of long term finance for agricultural development if such society does not use as part of its name, or in connection with its business, the words “bank”, “banker” or “banking” and does not act as drawee of cheques;

(ii) Amendment of Section 45 to address the potential disruptions in the financial system by providing for the Reserve Bank of India to prepare a scheme for the reconstruction or amalgamation of the banking company without the necessity of first making an order of moratorium;

(iii) Amendment of Section 56 to provide that notwithstanding anything contained in any other law for the time being in force, the provisions of the Act shall apply to co-operative societies, subject to the modifications specified therein

Read the detailed bill, here: BILL

The Banking Regulation (Amendment) Bill, 2020 was passed in Lok Sabha on 16-09-2020.


Lok Sabha

Legislation UpdatesNotifications

Central Board of Direct taxes notifies a clarification that the imposition of a charge on the prescribed electronic modes under Section 269 SU of the Income Tax Act.

Based on Section 10 A of the Payment and Settlement Systems Act, 2000, any charge including the Merchant Discount Rate shall not be applicable on or after 01-01-2020 on payment made through prescribed electronic modes.

However, representations have been received that some banks are imposing and collecting charges on transactions carried out through UPI. A certain number of transactions are allowed free of charge beyond which every transaction bears a charge.

The above-stated act on part of banks is a breach of Section 10 A of the PSS Act as well as Section 269SU of the IT Act. Such breach attracts penal provisions under Section 271 DB of the IT Act as well as Section 26 of the PSS Act.

Therefore, bank are advised to immediately refund the charges collected, if any, on or after 1st January, 2020 on transactions carried out using the electronic modes prescribed under Section 269 SU of the IT Act and not to impose charges on any future transactions carried through the said prescribed modes.

Following were prescribed electronic modes under Section 269 SU of the Income Tax Act:

  • Debit Card powered by RuPay
  • Unified Payments interface (UPI)(BHIM-UPI)
  • Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code)

Legislation UpdatesStatutes/Bills/Ordinances

In pursuance of the commitment to ensure safety of depositors across banks, the President has promulgated the Banking Regulation (Amendment) Ordinance, 2020(Click to view the Gazette notification on the Ordinance)

The Ordinance amends the Banking Regulation Act, 1949 as applicable to Cooperative Banks. The Ordinance seeks to protect the interests of depositors and strengthen cooperative banks by improving governance and oversight by extending powers already available with RBI in respect of other banks to Co-operative Banks as well for sound banking regulation, and by ensuring professionalism and enabling their access to capital. The amendments do not affect existing powers of the State Registrars of Co-operative Societies under state co-operative laws. The amendments do not apply to Primary Agricultural Credit Societies (PACS) or co-operative societies whose primary object and principal business is long-term finance for agricultural development, and which do not use the word “bank” or “banker” or “banking” and do not act as drawees of cheques.

The Ordinance also amends Section 45 of the Banking Regulation Act, to enable making of a scheme of reconstruction or amalgamation of a banking company for protecting the interest of the public, depositors and the banking system and for securing its proper management, even without making an order of moratorium, so as to avoid disruption of the financial system.


Ministry of Finance

[Press Release dt. 27-06-2020]

[Source: PIB]

COVID 19Op EdsOP. ED.

The current articles deals with RBI’s announcement on 27.03.2020 and 22.05.2020 regarding moratorium on term loans up to 31.08.2020. It points to certain areas of concern and provides pointers for further consideration by RBI and policy-makers. 

The outbreak of the COVID-19 pandemic has brought the economic activity in the country to a grinding halt. An already debilitated banking environment now faces the new challenges for maintaining liquidity and servicing borrowers many of whom are facing a near collapse on both demand and supply side. The problem will be more acute for SME, MME and small entrepreneurs who may not possess the staying power to tide over the present phase of uncertainty.

Reserve Bank of India in the immediate aftermath of the outbreak and lockdown came out with a press statement on 27.03.2020 regarding moratorium on term loan and working capital loan. The objective it appears is to provide some immediate relief to the borrowers facing liquidity crunch. The relevant portion of the statement was:

“STATEMENT ON DEVELOPMENT AND REGULATORY POLICIES

II. Regulation and Supervision

    *                                 *                                               *

5. Moratorium on Term Loans

All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India financial institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.

6. Deferment of Interest on Working Capital Facilities

In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are being permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. The accumulated interest for the period will be paid after the expiry of the deferment period.

In respect of Paras 5 and 6 above, the moratorium/deferment is being provided specifically to enable the borrowers to tide over the economic fallout from COVID-19. Hence, the same will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade. The lending institutions may accordingly put in place a Board approved policy in this regard.

7. Easing of Working Capital Financing

In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions may recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes in credit terms permitted to the borrowers to specifically tide over the economic fallout from COVID-19 will not be treated as concessions granted due to financial difficulties of the borrower, and consequently, will not result in asset classification downgrade.

In respect of Paras 5, 6 and 7, the rescheduling of payments will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. CICs shall ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries.”

This “moratorium” now stands extended for a further 3 month period announced by RBI on 22.05.2020, RBI Statement on “Development and Regulatory Policy”. The new statement provides extension of export credit from 1 year to 15 months, permits banks to allow deferment on working capital payment up to 31.08.2020, conversion of the accumulated interest on working capital loans up to the extension period up to 31.08.2020 into a interest term loan repayable by the end of the financial year and extends the previous moratorium on payment of EMIs on term loans up to 31.08.2020.

The previous press statement was necessary to provide immediate succor, in the background of the sudden pandemic and announcement of a pan India lockdown. The subsequent announcement on 22.05.2020 merely extends the same.

RBI now may additionally consider a more medium to long term objective of facilitating the sector/business wise revival of the economy. The salient points of concern are as follows:

              1. While the moratorium announced on 27.03.2020 was ostensibly for a three month period, most borrowers would have paid their EMI for the month of March, 2020 before the statement.

There is no reduction in repayment liability as interest and principal will have to be serviced but after the three month moratorium period up to 31.08.2020.

              2. Interest will continue to be charged for the moratorium period and hence, one’s outstanding EMI payment will be higher after the moratorium period than had one paid on a monthly basis. This is likely to be a cause of immediate stress for many borrowers.

              3. While RBI expects borrowers to tide over the liquidity problem, it is unlikely that the same can be overcome by most borrowers as there is still uncertainty surrounding how the lockdown will actually be rolled back. Consumer demand is expected to remain very low and cautious even post lockdown and hence the expectation of prompt revival of demand close to previous levels is unlikely.

            4. In most sectors the supply chain or/and labour force have been disrupted. Any revival in production and ergo liquidity will therefore necessary have to await restoration of the same post lockdown. Only such revival will help enterprises in servicing their credit facilities.

            5. The Government of India has issued an advisory asking all public and private enterprises to ensure that their workers are not retrenched on the pretext of the pandemic and are paid full wages for the period of the lockdown. The Supreme Court in Alakh Alok Srivastava v. Union of India[1], in the context of the Disaster Management Act, stated in its order dated 31.03.2020:

Disobedience to an order promulgated by a public servant would result in punishment under Section 188 of the Penal Code. An advisory which is in the nature of an order made by the public authority attracts Section 188 of the Penal Code.

The Government advisory will be very difficult to enforce, however if the same is strictly enforced it will be another factor of stress that will affect liquidity.

           6. It may be prudent that the banks assess the situation borrower wise/sector wise. This aspect would require RBI’s earnest consideration.

            7. A separate framework may also be formulated for bona fide borrowers with transient default/minor defaults or undergoing a reschedulement of their credit facilities who were servicing their credit facilities but have been hampered by the lockdown and pandemic.

Thus while summarising the above it is clear that while RBI press statement was aimed to be a limited immediate step further flexibility ought to be allowed to the banks that would help them make a clear and detailed assessment of both demand, production and supply side factors borrower/segment wise to assist in revival of the bona fide borrowers. 

Many enterprises in the present face peculiar problems. The credit facilities were availed envisaging a certain level of demand and supply. Currently there is a lack of availability of raw materials, labour, transport incapacitating production and distribution. The current near collapse of demand in many sectors has lead to the absence of potential to service the credit facilities. It may also lead to perishing of final goods and atrophy of stocks and assets.

A grim but very likely consequence is that many enterprises may not be able to bear the burden of near collapse of projected demand even post 31.08.2020. They will not be able to service their outstanding EMIs and in a few months thereafter will fall into the NPA category. This will further bar trade for many in terms of their contractual stipulations that require them to be solvent. It many cases it will create stress on their stock value and adversely affect investor confidence.  It will affect the credit ratings of the borrowers. In such a scenario the inevitable legal proceedings under the Insolvency Code, SARFAESI and for debt recovery, will lead to collapse of numerous industries that may have a chance at revival, if they given the necessary helping hand. It will overburden an already overloaded judicial system. The same will have ramifying effects on ancillary units and ultimately the health of the economy.

Further increase in NPAs, costly legal proceedings will also impact the profit and loss statement of the banks and their market perception.

With an objective to revive the borrower out of the current imbroglio I suggest that RBI may consider to formulate a more detailed medium to long term plan focusing on revival of the borrower after taking inputs from industry and banks. The following points may be kept in mind while framing its response for borrowers who were servicing their credit facilities but for the pandemic or those who even while servicing their EMIs are in need of easing repayment schedules:

  1. While the complete lockdown may be ended, lockdown may continue in certain areas or industrial sectors and therefore a flexible approach needs to adopted by RBI and banks;
  2. Allow banks greater flexibility to assess the default borrower /sector wise taking into account factors both on the supply side and demand side  and the bona fides of the borrower;
  3. Allow banks upon assessment to shape and support and if necessary reschedule loans synchronised with the pace of revival of economic activity;
  4. The benefit of the recent reduction in REPO rate and CRR granted by RBI to banks should be passed on to the ultimate consumer/borrower;
  5. RBI may consider to review and consider relaxation of norms for provisioning and classification of accounts as NPA, allowing banks greater window to work with the borrower for standardisation of the account without any stress on the assets available with the banks;
  6. RBI may also formulate a plan for borrowers with minor or transient defaults, or whose credit facilities were reschedule immediately prior to the lockdown to avail the necessary support from the lending bank;
  7. Assist banks to work together on the above mentioned lines in cases of consortium loans.

* Author is a graduate from National Law School of India University and has been practicing before the Supreme Court for past 17 years. He works in area of Banking and taxation laws.

[1] 2020 SCC OnLine SC 345  

Cabinet DecisionsCOVID 19Legislation Updates

Union Cabinet has given its approval to extend repayment date upto 31.08.2020 for Standard Short-Term loans upto Rs 3 lakh advanced for agriculture and allied activities by banks, which have become due or shall become due between 1st March, 2020 and 31st August, 2020 with continued benefit of 2% Interest Subvention (IS) to Banks and 3% Prompt Repayment Incentive (PRI) to farmers.

Benefit:

Extension of repayment date upto 31.08.2020 for Standard Short-Term loans upto Rs.3 lakh for agriculture and allied activities by banks falling due between 1st March, 2020 and 31st August, 2020 with continued benefit of 2% IS to Banks and 3% PRI to farmers, shall help the farmers to repay/renew such loans upto the extended repayment date of 31.08.2020 at 4% p.a., interest without attracting any penalty and thus help them in avoiding travelling to banks for such renewal during this COVID pandemic period.

Background

Govt. is providing concessional Standard Short-Term Agri-loans to farmers through banks with 2% p.a, interest subvention to banks and 3% additional benefit on timely repayment to farmers thus providing loans upto Rs 3 lakh at 4% p.a. interest on timely repayment.

In the wake of lockdown due to ongoing Covid 19 pandemic, there have been restrictions imposed on movement of people. Many farmers are not able to travel to bank branches for payment of their short term crop loan dues. Moreover, due to restrictions on movement of people, difficulty in timely sale, receipt of payment of their produce and the necessity of adhering to social distancing norms, farmers are finding it difficult to arrange the amount to be deposited for renewal and are unable to visit the banks to deposit and draw fresh loans.


Cabinet

[Press Release dt. 01-06-2020]

Case BriefsSupreme Court (Constitution Benches)

Supreme Court: The 5-judge bench of Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose, JJ has held that

“’banking’ relating to co­operatives can be included within the purview of Entry 45 of List I, and it cannot be said to be over inclusion to cover provisions of recovery by co­operative banks in the SARFAESI Act.”

The judgment of the Court came in a reference made in view of conflicting decisions in Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd., (2007) 6 SCC 236, Delhi Cloth & General Mills Co. Ltd. v. Union of India, (1983) 4 SCC 166, T. Velayudhan Achari v. Union of India, (1993) 2 SCC 582 and Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275.

Holding that Co­operative bank’s entire operation and activity of banking are governed by a law enacted under Entry 45 of List I, i.e., the BR Act, 1949, and the RBI Act under Entry 38 of List I, the bench said,

“recovery of dues would be an essential function of any banking institution and the Parliament can enact a law under Entry 45 of List I as the activity of banking done by co­operative banks is within the purview of Entry 45 of List I. Obviously, it is open to the Parliament to provide the remedy for recovery under Section 13 of the SARFAESI Act.”

The Court further explained that the main aspect of the activity of the cooperative bank relating to banking was covered by the BR Act, 1949, and the Reserve Bank of India Act, which legislations are related to Entries 45 and 38 of List I of the Seventh Schedule. The aspects of ‘incorporation, regulation and winding up’ are covered under Entry 32 of List II of the Seventh Schedule.

“In our opinion, the activity of banking by such bankers is covered by Entry 45 of List I considering the Doctrine of Pith and Substance, and also considering the incidental encroachment on the field reserved for State is permissible.”

It further said that by enacting the SARFAESI Act, Parliament does not intend to regulate the incorporation, regulation, or winding up of a corporation, company, or co­operative   bank/cooperative society. It provides for recovery of dues to banks, including co­operative banks, which is an essential part of banking activity. The Act, hence,  in no way trenches on the field reserved under Entry 32 of List II and is a piece of legislation traceable to Entry 45 of List I.

In a 159-pages long verdict, the 5-judge concluded,

  • The co­operative banks registered under the State legislation and multi­State level co­operative societies registered under the Multi­State Co­operative Societies Act, 2002 (MSCS Act, 2002) with respect to ‘banking’ are governed by the legislation relatable to Entry 45 of List I of the Seventh Schedule of the Constitution of India.
  • The co­operative banks run by the co­operative societies registered under the State legislation with respect to the aspects of ‘incorporation, regulation and winding up’, in particular, with respect to the matters which are outside the purview of Entry 45 of List I of the Seventh Schedule of the Constitution of India, are governed by the said legislation relatable to Entry 32 of List II of the Seventh Schedule of the Constitution of India.
  • The co­operative banks involved in the activities related to banking are covered within the meaning of ‘Banking Company’ defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949, which is a legislation relatable to Entry 45 of List I. It governs the aspect of ‘banking’ of co­operative banks run by the co­operative societies. The co­operative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to ‘Banking’ in Entry 45 of List I and the RBI Act relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India.
  • The co­operative banks under the State legislation and multi­State co­operative banks are ‘banks’ under section 2(1)(c) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The recovery is an essential part of banking; as such, the recovery procedure prescribed under section 13 of the SARFAESI Act, a legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India, is applicable.
  • The Parliament has legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution of India to provide additional procedures for recovery under section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 with respect to cooperative banks. The provisions of Section 2(1)(c)(iva), of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, adding “ex abundanti cautela”, ‘a multi­State co­operative bank’ is not ultra vires as well as the notification dated 28.1.2003 issued with respect to the cooperative banks registered under the State legislation.

[Pandurang Ganpati Chaugale v. Vishwasrao Patil Murgud Sahakari Bank Ltd,  2020 SCC OnLine SC 431 , decided on 05.05.2020]

Case BriefsSupreme Court

Supreme Court: Taking suo motu cognizance of the issue relating to the expeditious trial of cases under Section 138 of Negotiable Instruments Act, 1881, the bench of SA Bobde, CJ and L. Nageswara Rao, J has issued notice to the Union of India through Law Secretary, Registrar General of all the High Courts, the Director General of Police of all the States and Union Territories, Member Secretary of the National Legal Services Authority, Reserve Bank of India and Indian Bank Association, Mumbai as the representatives of Banking institutions.

The said action of the Court came after noticing that despite many changes brought through legislative amendments and various Supreme Court decisions mandating speedy trial and disposal of these cases, the Trial Courts are filled with large number of pendency of these cases. A recent study of the pending cases, reflects pendency of more than 35 lakh, which constitutes more than 15 percent of the total criminal cases pending in the District Courts.

Here’s is what the Court suggested whule posting the matter on April 16, 2020 for further hearing:

  • there is a need to evolve a system of service/execution of process issued by the court and ensuring the presence of the accused, with the concerted efforts of all the stakeholders like Complainant, Police and Banks.
  • an information sharing mechanism may be developed where the banks share all the requisite details available of the accused, who is the account holder, with the complainant and the police for the purpose of execution of process. This may include a requirement to print relevant information, viz the email id, registered mobile number and permanent address of the account holder, on the cheque or dishonour memo informing the holder about the dishonour.
  • RBI, being the regulatory body may also evolve guidelines for banks to facilitate requisite information for the trial of these cases and such other matters as may be required.
  • a separate software-based mechanism may be developed to track and ensure the service of process on the accused in cases relating to an offence under Section 138 of N.I. Act.
  • RBI may consider developing a new proforma of cheques so as to include the purpose of payment, along with other informations mentioned above to facilitate adjudication of real issues.
  • a mechanism may be developed to ensure the presence of the accused even by way of coercive measure, if required, taking effect from Section 83 of Cr.P.C. which allows attachment of property, including movable property.
  • an effort may be evolved to recover interim compensation under Section 143A of the N.I. Act as well as fine or compensation to be recovered as per Section 421 of Cr.P.C.
  • National Legal Services Authority, being the responsible Authority in this regard, may evolve a scheme for settlement of dispute relating to cheque bounce at pre-litigation i.e. before filing of the private complaint. An Award passed at the pre-litigation stage or pre-cognizance stage shall have an effect of a civil decree.

“This measure of prelitigation ADR process can go a long way in settling the cases before they come to Court, thereby reducing docket burden.”

  • High Courts may also consider setting up of exclusive courts to deal with matters relating to Section 138, especially in establishments where the pendency is above a standard figure. Special norms for assessment of the work of exclusive courts may also be formulated giving additional weightage to disposal of case within the time-frame as per legal requirement.

The Court appointed Senior Advocate Siddharth Luthra as Amicus Curiae and Advocate K. Parameshwar to assist the amicus curiae in the matter.

[In Re: Expeditious trial of cases under Section 138 of N.I. Act, 1881, Suo Moto Writ Petition (Criminal), arising out of SPECIAL LEAVE PETITION (CRIMINAL) NO. 5464 OF 2016, order dated 05.03.2020]

Business NewsNews

The government and banks have unveiled a new strategy to revive stressed assets outside the Insolvency and Bankruptcy Code (IBC), including through asset management companies (AMCs) and investment funds that are expected to help lenders generate better value, while cleaning up their books to enable further lending. The plan includes a thrust for loans of up to Rs 50 crore given to small and medium enterprises as well as mid-segment loans of up to Rs 500 crore. A special focus will be on loans of over Rs 500 crore, where the plan is to use independent AMCs, which could be set up by banks and other investors to manage assets acquired by the asset reconstruction companies (ARCs) to nurse them back to health and generate value when the market improves.

A second element of this plan is to rope in alternate investment funds (AIFs) that will provide capital support to the ARCs and the AMCs to acquire the entire loan from all banks as opposed to the current practice where a handful of lenders sell the stressed assets to ARCs. The proposed structure, which may kick off soon, is expected to help banks generate cash instead of securities with 5-6 year maturity that are currently issued by ARCs.

A committee of bankers, submitted the report on resolution of stressed assets. Apart from resolution approaches for small, medium and large loans, the panel set up in June, 2018 also recommended that assets that are not resolved within the RBI-stipulated 180-day deadline be sent to the National Company Law Tribunal (NCLT) for action under the IBC. It has also suggested an asset-trading platform for banks to trade in performing as well as non-performing loans. While the idea of AMCs and AIFs was proposed by the banks, it is also seen to have the encouragement and support of Goyal. The plan addresses the concerns of the Finance Ministry bureaucracy as it will not entail any obligation on the exchequer and has been structured within the current regulatory remit.

[Source: The Times of India]

Business NewsNews

The Reserve Bank of India (RBI) tightened rules on banks’ statutory auditors saying it reserved the right to not approve appointments of such auditors for a specified period if their audit quality was not found satisfactory. The RBI said it will take action against statutory auditors of banks in case of any lapses in their auditing processes including instances such as misstatement of a bank’s financial statement or wrong information in audit report. The framework would cover, inter alia, instances of divergence identified in asset classification and provisioning during the RBI inspection vis-à-vis the audited financial statements of banks.

[Source: The Economic Times]

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of T.S. Thakur, CJ and A.M. Khanwilkar and D.Y. Chandrachud, JJ dismissed the PIL challenging the Centre’s policy to allow private bank officials to be appointed as Managing Directors or CEOs of public sector banks.

It was contended that only whole-time directors of public sector banks, whose names are cleared by the Central Vigilance Commission, can be appointed to head public sector banks and that eligibility criteria for the posts of CEO and MD of the five banks have been set with a sole objective to make all existing executives directors of Public Sector Banks ineligible.

The Court rejected the said petition and said that there was nothing wrong with such appointments.

Source: Business Standard