Bank’s Response To Borrower Cannot Be Considered An Order Of Statutory Authority

KEY TAKEAWAYS

• The Karnataka High Court ruled that the principles applicable to judicial review of a bank's response to its customers will differ from those applicable to judicial review of statutory functionaries' actions.
• The above observation was made by a single judge bench of Justice Krishna S Dixit.

BACKGROUND

• In the current case, the petitioner company's loan account with South Indian Bank was declared a Non-Performing Asset (NPA) in December 2019.
• As a result, the respondent bank initiated coercive recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (SARFAESI Act).
• The petitioners' request for financial assistance under the Credit Guarantee Scheme for Subordinate Debt (scheme) was denied through a simple communication, prompting the current petition before the High Court.
• Senior Advocate Aditya Sondhi, who represented the petitioner, argued that the bank's communication was unlawful because it did not include reasons for the rejection.
• It was also argued that because the bank is a state instrumentality under Article 12 of the Indian Constitution, it was required to provide reasons in the communication for rejecting the petitioners' request for financial assistance under the Scheme.

COURT’S OBSERVATION

• The Court rejected the argument, stating that the bank is not a statutory body.
• Furthermore, the Court stated that transactions between a banker and a borrower have the overtones of a contractual relationship even if the lender bank is an instrumentality of the 'State' under Article 12 of the Indian Constitution.
• The Court also stated that banks that make decisions not to sanction certain financial requests cannot be held liable, as approximately two dozen public sector banks have been closed down or merged with other banks in recent years, with unscrupulous lending being one of the primary causes.
• The Court also stated that reckless speculation and greedy profiteering endangers the safety of public funds and are avoided by prudent bankers all over the world.
• The court rejected the petition.

• What are your views on the Judgment?
• What do you mean by a Non Performing Asset?

Share your answers in the comments section below.