BANKS- MUST ACT REASONABLY

[DEV KUMAR KOTHARI]

BANKS- MUST ACT REASONABLY TO ACCEPT PAYMENT UNDER ONE TIME SETTLEMENT SCHEME OR OTHERWISE – businesslike and timely approach is required to be adopted by banks, to reduce NPA and litigation and improve profitability of banks.

Recent case law:

MD. AFROZ BAIG VERSUS STATE BANK OF INDIA [2022 (10) TMI 187 - TELANGANA HIGH COURT]

And various judgments referred therein.

Geeral discussion by author as preface to the subject matter and title of article:

Commercial transactions:

Banking loan transactions are commercial transactions, wherein bank grant, disburse, and recover loan and interest thereon from time to time. When giving a loan taken for commercial purpose or even other purposes the bank and borrowers both act as per foreseeable events in future and planning of the borrower.

Therefore, there is always an element of contingency because in practical life always events do not take place as planned. There can be some quick development in which borrower can repay loan early or there can be some situations in which a delay in repayment can occur.

As a money lender banks also take risks:

A moneylender also takes a risk while granting and disbursing loan. That is why rate of interest on loans vary according to facts and circumstances, terms and conditions, security provided and contingencies and uncertainties involved.

Uncertainties even in case of fully secured loans granted:

Even in case of fully secured loan granted with reasonable margin, there can be contingencies based on future happening. For example, even in case of loan granted against Fixed Deposits  (FD)by the same bank, there can be situations that borrower is not able to service loan by paying interest on loan, which is usually payable every month. The rate of interest on such loan is usually rate of interest on FDR plus 2%. On FDR interest is accumulated or paid periodically or paid on maturity as per terms and conditions. In case a borrower faces difficulty and is unable to pay interest regularly, interest on loan is compounded every month. Therefore, burden of interest goes up causing further difficulties in payment of interest and repayment of loan.

Suppose a borrower want to repay loan by premature withdrawal or surrender of FD, it may not work out because on one hand bank will charge a penalty and pay interest at reduced rate depending on tenure lapsed out of FD tenure. Whereas rate of interest on loan will not be reduced correspondingly. Therefore, in such situation also there can be shortfall of security

Even in case of loan to fixed income earners ( like salaried people) there can be contingencies due   to health and other problems of borrower or his family members, problems related with employment causing reduced or discontinued inflow of income.

Therefore, bank has to take a reasonable approach in recovery of loans if circumstances so require.

Old styled money lending with aim to forfeit security is not workable:

It must be kept in mind by present days   money lender / particularly banks and NBFC  who are regulated and have to follow law that their business is grant loans , help borrower and earn interest and ensure timely  recovery of loan by treating each loan as a source of business and  regular earing.

 It is not a case of old styled money lenders,  sahukars, zamindar, kabliwala who had approach to keep borrower in their grip and ultimately forfeit the security which will be  much more valuable than the amount of loan and  even higher and frequently accumulated interest.    

MD. AFROZ BAIG VERSUS STATE BANK OF INDIA [2022 (10) TMI 187 - TELANGANA HIGH COURT]

Is a recent case in which borrower has to approach High Court to seek extension of one day for paying last instalment as per OTS scheme.

Without going into history of loan account, default, and order of DRT and Courts, the last leg is considered in this article.

The borrower made application for one time settlement (OTS) as per OTS scheme introduced by Bank. The application was accepted. In the payment of last instalment there was delay  of one day in submission of cheque by borrower  .

The borrower  had submitted letter dated 28.07.2021 with cheque for last instalment under OTS.

But the same was not accepted by Bank on the ground that the borrower has not paid the aforesaid amount by 27.07.2021 as per the terms and conditions of the OTS Scheme. Therefore, the bank vide letter dated 31.07.2021, cancelled the OTS scheme and requested the borrower to repay the entire outstanding amount together with interest.

The borrower had  to challenging the same and filed Writ Petition (WP) in the High Court.

From order and judgment- para 19  and 20 are reproduced with highlights added by author:

            19. In the present case, it is specifically contended by the petitioner that he is doing real estate business, due to the present COVID-19 pandemic situation, he sustained loss. However, to clear the loan, he sold the property and received money from the purchaser and deposited the same in the account and paid the entire loan amount including the interest vide his letter dated 28.07.2021. There is only one day delay. Therefore, according to this Court, it is a fit case to extend the time to the petitioner to repay the loan amount.

20. In view of the same, this writ petition is allowed. The letters, dated 31-07.2021 and 06.08.2021 issued by 2nd respondent bank are set aside. 2nd respondent bank is directed to receive the said amount of Rs.37,87,567/- (Rs.35,09,995.38ps + interest of Rs.2,77,571.62ps) from the petitioner and close the loan account bearing No.A/c.No.35424522518 of the petitioner. Ten days time from today is granted to the petitioner to clear the said amount along with interest, at the agreed rate between the petitioner and 2nd respondent Bank, failing which, 2nd respondent bank is at liberty to proceed with the matter in accordance with law.

Miscellaneous Petitions, if any, pending, shall also stand closed.”

Authors point of view:

Therefore, a practical view was taken by the High Court allowing petition. In fact, the bank must have a bit flexible and reasonable approach and carry out business as a businessperson on reasonable basis. It is experienced that due to unreasonable approach adopted by bank officers  in reviewing changed circumstances, non-performing loans occur and accumulate leading to court cases. The Courts have to direct them in businesslike manner.

Let us hope that the bank will accept the judgment and will not dispute it before Higher Forum – the Division Bench or the Supreme Court.

This was a fit case for awarding costs payable by bank in favor of borrower. However, the judgment is silent about it.

Contentions  about maintainability of WP

The honorable Court has to very seriously  deal with the matter of maintainability of WP. In this regard  we find discussions in paragraph 11 to 18 of the judgment, in which other judgments of the Supreme Court and High Courts have been considered. The same are analyzed and summarized by way of highlighting for easy understanding:

11. It is relevant to note that in Anu Bhalla Vs. District Magistrate, Pathankot  , the Division Bench of Punjab and Haryana High Court held that High Court in exercise of its jurisdiction under Article 226 of the Constitution of India is having power to extend the period of settlement as of originally provided for in the OTS Letter. In the said case, the Division Bench has laid down certain illustrative guidelines to be considered cumulatively or individually on facts on case to case basis whether an applicant would be entitled for extension of OTS or not and the same are mentioned below:-

         i. The Original Time provided in the Settlement-in our considered opinion the first and foremost aspect to be noticed would be the time period originally granted by the bank to pay off the settlement amount. If the time period originally stipulated in the settlement letter to pay off the settlement amount is short or not excessive, the case for extension then could be considered. It is to be noticed that the borrower is to arrange funds to complete the OTS. If reasonable time period is not given, the very purpose of settlement would be defeated. In that eventuality application for extension can be considered so that the borrower gets a reasonable time to clear off the settlement and the deposit of substantial amount and the ultimate purpose of settlement is achieved. ii. Extent of payments already deposited under the settlement or before filing the petition- while considering an application for extension of time under OTS, the prime objective to be noticed is the intention of the borrower to culminate the settlement. If the borrower has already paid substantial amounts, to the creditor under the OTS, and for some remaining amounts is seeking a reasonable extension, such requests can be considered favorably. This shows, that the applicant had an intention to clear the settlement and the deposit of substantial amounts, is an indication in this regard.

 iii. Reasons which led to delay in the payment- it is important to notice, the reasons, which led to delay on the part of the borrower. If the borrower was prevented by certain reasons or circumstances beyond his control, it could be a reason to consider an application for extension favorably. It would be imperative for the borrower to show, that he made his best efforts to ensure that the requisite amounts, are arranged within the specified time, but in spite of all his best efforts, he could not arrange the same. iv. Payments having been accepted by the bank/Financial institutions, after the stipulated date – if the bank or the financial institution has been accepting the payments from the borrower towards the settlement even after the stipulated period of time, it shows that the time was not the essence of contract. It would be apparent from such conduct of the parties, that certain amount of relaxation or flexibility in making the payment of OTS amount is reserved between the parties. v. Bona fide Intent of the borrower to pay the remaining amounts under the settlement- In order to test the bona fide intention of such an applicant, it could be reasonably be tested while asking such an applicant to deposit some further amount, towards the balance amount before calling upon the bank to consider the issue of the extension. If such amounts are deposited under the orders of the court and the bona fides are established, such an applicant would be entitled for a favorable consideration of an application for extension. We would like to add a caveat that if for any reason, the effort doesn’t lead to extension of time, as prayed for by the petitioner, then the amount deposited by the borrowers/depositors under the interim orders of the court, would have to be returned by the creditor to the petitioner. We draw strength from the recent judgment of the Hon’ble supreme court in Kut energy Pvt. Ltd .v, Authorized officer, Punjab National Bank bearing Civil Appeal No.6016- 6017/2019 decided on 20.08.2019. [M/S KUT ENERGY PVT. LTD. & ORS. VERSUS THE AUTHORIZED OFFICER, PUNJAB NATIONAL BANK, LARGE CORPORATE BRANCH, LUDHIANA & ORS.- 2019 (8) TMI 903 - SUPREME COURT] In the said case, the petitioner therein deposited upfront amount in the registry of the court to show its bona fide in support to its OTS proposal which was offered for consideration of the bank. The bank while rejecting the proposal sought to adjust the upfront amount against the contractual dues. The plea of refund raised by the petitioner was rejected by the high court which led to filing of an appeal before Hon’ble Supreme court. While allowing the appeal, it was held the deposit of the amounts in terms of interim order of high court was only to show the bona fides of the appellants when the revised order was made by them. The deposit was not towards the satisfaction of the debt in question. Hence, the bank was not justified in retaining the said upfront amount, while rejecting the OTS offer of the appellant therein and hence the bank ought to have refunded the upfront amount, if the OTS offer of the borrower was found to be unacceptable.

vi. Time period being demanded by the applicant to clear the remaining/balance settlement amount.- An applicant whose intention would be to clear the balance settlement amounts, would not claim for a unreasonable period of an extension, as otherwise, the intention would be to gain more time, without any actual intent to clear the settlement. In the facts and circumstances of each case, the Courts would therefore determine a reasonable period, to enable the borrower to clear the remaining settlement amount, subject of course, to payment of reasonable interest for the delayed period, to balance the equities.

vii. Attending factors and circumstances:- Attending factors and circumstances involved, while making an application for extension play an important role to identify eligible and deserving cases as also to determine the extent of extension to be granted. For example , the current situation where the entire country has been adversely effected on account of COVID-19 pandemic, the difficulties in arranging the amounts could be taken note of while determining the period of extention to be granted to an applicant. Further, accounts which have suffred losses and became NPA on account of having suffered natural calamities, unfortunate accidents, fire incidents, thefts, damage by floods, storm etc., and have come forward for an eventual settlement, can also be considered for extension of time.

 viii. Irreparable loss and injury to the applicant:- While examining an application for extension of settlement, it could also be seen to be noticed, the extent of an injury to be suffered by an applicant.

12. In Samarth Woolen Mills Vs. Indian Bank (Erstwhile Allahabad Bank)2 in CWP No.15895 of 2020 (O&M), decided on 04.06.2022 by the Division Bench of Punjab and Haryana High Court, relying on the principle laid down by the Division Bench of the same Court in Anu Bhalla (supra) held that High Court in exercise of its inherent power under Article 226 of the Constitution of India can extend period mentioned in the OTS letter under certain circumstances. In the said case, considering the fact that the Loanee had paid the entire amount of OTS though with some delay and the circumstances of the case justified and granted extension of time by about six months and the said delay, the bank cannot be compensated by payment of interest.

13. Another Division Bench of P&H High Court in Hindustan Trading Company Vs. Indian Oversees Bank , has also reiterated the said principle and granted extension of time to the petitioner for making payment as per the sanctioned OTS.

14. In M/S SARDAR ASSOCIATES & ORS. VERSUS PUNJAB & SIND BANK & ORS.  - 2009 (7) TMI 1274 - SUPREME COURT , the Apex Court held that the Reserve Bank of India is a statutory authority. It exercises supervisory power in the matter of  functionings of the Scheduled Banks. The matter relating to supervision of Scheduled Banks is also governed by the Reserve Bank of India Act, 1934. It held that the guidelines were issued by the Reserve Bank of India by reason of a letter dated 3.09.2005 addressed to the Chairman/ Managing Director of all public sector banks. It clearly refers to a circular dated 19.08.2005 issued by the Reserve Bank of India in terms whereof it was directed that one time settlement scheme for recovery of NPA below Rs. 10 crore was laid down. The said letter was issued pursuant to the aforementioned circular in terms whereof one time settlement scheme was formulated for recovery of NPA below Rs. 10 crores. It was categorically stated therein that the same was required to be implemented by all public sector banks. The guidelines issued were to provide a simplified, non- discretionary and non-discriminatory mechanism therefor in SME sector.

15. The Apex Court further held that the public sector banks have to implement the guidelines of RBI relating to OTS as per its decision in Central Bank of India Vs. in Central Bank of India v. Ravindra  , that the Board of Directors of Bank in the said case could not have deviated from the said guidelines and it’s conduct was violative of the equality clause contained in the RBI guidelines and also Article 14 of the Constitution of India. The bank itself has made an offer to accept the proposal of the payment in regard to enforcement of OTS pursuant to the RBI guidelines and it was certainly aware of the amount of securities lying with it.

16. In M/s Indo Swiss Time Limited vs Umrao  , the Full Bench of Punjab & Haryana High Court held that if there is direct conflict between the decisions of the Apex Court rendered by two equal Benches, the High Court must follow the judgment which appears to it to lay down the law more elaborately and accurately. The mere incidence of time whether the judgment earlier or later could hardly be relevant.

 In Punjab and Sind Bank Vs. Oberoi Cars Pvt.Ltd.  Delhi High Court relying on the terms of OTS Policy therein, held that the High Court can extend timelines of OTS on examination of the facts therein and also on satisfying the reasons mentioned by the loanee. The said principle was reiterated by the High Court of Kerala at Ernakulam in WPC No.19673 of 2021, dated 03.01.2022.

18. The sum and substance of the above stated judgments is that this court by invoking its inherent powers under Article 226 of the Constitution of India can extend the time to the loanee to pay the amount agreed under OTS on satisfying the reasons mentioned therein on examination of the facts. In the similar circumstances, the Division Bench of this Court has already extended the time.”

Un quote:

Authors point of view contentions  about maintainability of WP:

Practical views have been was taken by the Courts allowing extension of time for payment under settlement. As
 discussed earlier, transaction of granting and receiving loan both involves uncertainties .

The ground reality is that while granting loans, banks also want display of rosy picture about future, otherwise it will not be possible to grant loan and target of loan disbursal will not be met. Therefore, a money lender grants loan assuming and considering  risks and rewards

Therefore,  in matter of recovery also  the bank must have a bit flexible and reasonable approach and carry out business as a businessperson on reasonable basis. Due to unreasonable approach adopted by bank officers  in reviewing changed circumstances, non-performing loans occur and accumulate leading to court cases.  As can be observed from the above-referred judgments, the Courts have to direct them to act in businesslike manner.

Ground reality is that in many cases due to unreasonable approach by banks, reasonable terms and conditions are not offered even when so offered by the borrower. In that situation , borrower also prefer to let bank file money suit and get it delayed and dragged. After some years, bank has to come out with NPA settlement schemes like CDR or OTS.

Experience shows that in many cases banks have to accept much lower amount under OTS in spite of having and holding security which might have appreciated over the period of litigation.

In this regard at cost of repetition author mentions some points from paragraph 14 and 15 of judgment:

              It was categorically stated in the Circular  that the  Circular / Scheme  / guidelines were  required to be implemented by all public sector banks.

             The guidelines issued were to provide a simplified, non- discretionary and non-discriminatory mechanism therefor in SME sector.

              The Apex Court further held that the public sector banks have to implement the guidelines of RBI relating to OTS as per its decision in Central Bank of India Vs. in Central Bank of India v. Ravindra

That the Board of Directors of Bank in the said case could not have deviated from the said guidelines and it’s conduct was violative of the equality clause contained in the RBI guidelines and also Article 14 of the Constitution of India.

The bank itself has made an offer to accept the proposal of the payment in regard to enforcement of OTS pursuant to the RBI guidelines and it was certainly aware of the amount of securities lying with it.