Supreme Courts clears doubt regarding the legality of interse transfer of Npa's by Banks

SUPREME COURT DECISION DATED 30.9.2010 IN 

ICICI BANK VS OFFICIAL LIQUIDATOR APS STAR INDUSTRIES LIMITED

By AKR

The Honourable Supreme Court has now held otherwise and has held that such transactions do not violate the provisions of the Banking Regulation Act 1949 and are legally sustainable. 

After analyzing the various provisions of the 1949 Act it was held by the SC that apart from the principal business of accepting deposits and lending, the BR Act leaves ample scope for the banking companies to venture into new businesses subject to such businesses being subject to the control of the Regulator, viz. RBI. It was held that the BR Act allows banking companies to undertake activities and businesses as long as they do not attract prohibitions and restrictions like those contained in Sections 8 (prohibition of trading)and 9 (Disposal of Non banking assets).

Relying on Section 6(1)(n) which enables a banking company to do all things,  as are incidental or conducive to promotion or advancement of the business of the company, it was held that RBI is empowered to enact a policy which would enable banking companies to engage in activities in addition to core banking and that RBI (regulator and policy framer in matter of advances and capital adequacy norms) is empowered to  develop a healthy secondary market, by allowing banks inter se to deal in NPAs in order to clean its balance sheets.  

It was further held that trading in NPAs has the characteristics of a bona fide banking business as the guidelines issued by RBI dated 13.7.2005 itself authorizes banks to deal inter se in NPAs. It was held that as the said guidelines were issued by RBI in exercise of the powers conferred by Sections 21 and 35A of the Act, they are having statutory force of law. The court has pointed out that the said guidelines itself had allowed banks to engage in trading in NPAs with the purpose of cleaning the balance sheets so that they could raise the capital adequacy ratio.

The court held that dealing in NPAs as part of the Credit Appraisal Mechanism and as a part of Restructuring Mechanism falls within the scope of Section 21r/w Section 35A of the Act and hence it cannot be said that "transfer of debts/NPAs" inter se between banks is an activity which is impermissible under the 1949 Act.  

Highlighting the need for liberal interpretation the court has held that while interpreting the BR Act one needs to keep in mind not only the framework of the banking law as it stood in 1949 but also the growth and the new concepts that have emerged in the course of time. The court observed that dealing in NPAs inter se by the banks needs to be looked in the larger framework of "Re-structuring of banking System".

The court has further held that an outstanding in the account of a borrower(s) (customer) is a debt due and payable by the borrower(s) to the bank and the bank is the owner of such debt. Such debt is an asset in the hands of the bank as a secured creditor or mortgagee or hypothecate and the bank can always transfer its asset. Such transfer in no manner affects any right or interest of the borrower(s) (customer) and there is no prohibition in the BR Act, 1949 in the bank transferring its assets interse.

The court further held that even in the matter of assigning debts, it cannot be said that the banks are trading in debts (as held by the Gujarat High Court) as the assignor bank has never purchased the debt(s) and it had only advanced loans against security as part of its banking business. The Supreme court has held that in transferring NPA’s, the assignor bank is only transferring its rights under a contract and its own asset, namely, the debt as also the mortgagee's rights in the mortgaged properties without in any manner affecting the rights of the borrower(s)/mortgagor(s) in the contract or in the assets. The court has in this respect observed that rights under a contract are always assignable unless the contract is personal in its nature or unless the rights are incapable of assignment, either under the law or under an agreement between the parties. 

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