Thursday, September 21, 2023

Banking Sector: Discordant Notes

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The RBI recently informed the apex court that a waiver on loan interest would jeopardise the banking sector. But two cases have shown that banks are biased towards the rich while the common man is left in the lurch

By Preeti Ahluwalia

India’s VIP culture is fundamentally inequitable and undermines the rule of law as exemplified in Article 14 of the Constitution. This culture has led to social stratification and feudalism, hurting the collective psyche of citizens. The State protects only a selected few like constitutional functionaries and the rest have to manage on their own. Even the kin of these VIPs, be it politicians, gurus, top bureaucrats or criminals, are treated with velvet gloves.

This has become evident in the controversial and discriminatory power given to banks to waive the principal amount or interest of some VIPs and accept a one-time settlement far below the actual amount. The common man, by comparison, is left to the mercy of bank officials and coerced to give in to their unreasonable and exorbitant demands.

However, on June 4, 2020, the RBI warned the Supreme Court that a forced waiver of interest on loans for a six-month moratorium period due to Covid-19 would hurt banks by as much as Rs 2 lakh crore and have “huge consequences” for the stability of the entire financial system. This might risk the financial viability of banks, which in turn may put depositors in jeopardy. This shows how difficult it is for the banking sector to allow waiver of interest. Then why do they allow this for select individuals? In real terms, the right to equa­lity has been violated.

Union Bank of India

Take the case of Victoria Agro Food Processing (P) Ltd, a Latur-based company that operates a grain-based distillery. It was set up in 2008 with Rs 40-crore financing from Union Bank of India and Bank of Maharashtra. Till 2011, the factory failed to start production due to “initial logjams in finetuning of machinery and getting desired outputs resulting in the scarcity of resources due to mismatch in cash flow and commitment”, some reports said. As a result, the loan was declared an NPA in June 2011, and the company’s directors were listed as “wilful defaulters”. The banks first attempted to take action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002. This Act permitted banks to take possession of the loan’s security, which, in this case, was the factory and the plot where it was located. Notices under the Act were issued in September and December 2011. Despite a decree granted by the Debt Recovery Tribunal in favour of the banks, they claimed that they failed to take physical possession of the mortgaged property due to “protest from borrowers/guarantors” till 2016.

But when the Supreme Court gave a shot in the arm for banks to take possession of secured assets once the account has been declared an NPA, why did it take four years for them to act against the borrowers and guarantors in the present case?

According to SARFAESI Act, 2002, banks can take physical possession or control of a mortgaged asset and sell or transfer it without the intervention of any court or third party. In case of any threat of violent resistance from the borrower, banks can take the help of the chief metropolitan magistrate or district magistrate of the area. When so many provisions are available, why did the banks take no action against Sambhaji Patil Nilangekar, Minister for Labour, Earthquake Rehabilitation and Ex-servicemen’s Welfare, who was a guarantor for the loan? In 2015, the company attempted to reach a one-time settlement with the two banks by trying to pay Rs 41 crore. The banks rejected this offer, saying that they “tried to convince the guarantor and key personnel Nilangekar to improve the offer”, but he did not do so.

Puzzlingly, in 2018, the same recovery departments and the two banks signed off on a much lower settlement—Rs 25.50 crore. Why? Just because, it is alleged, the company’s directors were related to a heavyweight ex-minister, who with his resources orchestrated a final settlement and closure of an outstanding loan of Rs 76 crore with interest as “one-time settlement”. The banks took a “huge haircut” and this too after refusing to settle the matter when the borrower/guarantor had offered Rs 41 crore when the outstanding amount was Rs 49.30 crore.

Bank of Maharashtra

According to a letter issued by the Bank of Maharashtra in 2018, banks had collateral security consisting of a theatre, shopping complex, residential unit and primary security of the land and building of a factory in Sakol, Latur, valued at Rs 60.38 crore. Further, the documents also disclosed the properties of Nilangekar in Delhi, Gurugram and Jaipur, which were valued at approximately Rs 100 crore. This meant that he had the capacity to pay more than just Rs 41 crore. With accumulated interest, the total amount owed by the company in 2018 touched Rs 76 crore. Thus, the banks scandalously wrote off over Rs 51 crore.

The different standards for the rich and famous can be seen in other sectors too. Lately, after a series of legal battles started by power sector companies, including some of the biggest corporate behemoths including Adani, Tata and Essar groups, the Supreme Court struck down a circular issued by RBI in February 2016 that forced banks to crack down on NPA accounts. It was argued that these power sector companies were on the verge of having massive loans turn into NPAs, and this legal process as well as efforts by the government prevented this from taking place. 

In many instances, bankers go out of their way to help companies connected to powerful individuals to acquire massive loans. Once these loans turn into NPAs, the banks write off large chunks of the amounts, despite fraud being discovered in many cases. The NPA crisis is a direct outcome of a nexus of politicians, industrialists and bankers. However, when it comes to the common man, it is a stark contrast.

Take the case of Summit Aviation Pvt. Ltd vs. Bank of Maharashtra and Punjab National Bank. In 2014, the guarantor had arranged a buyer who was willing to settle with the banks by paying Rs 15 crore for an outstanding loan of Rs 16.86 crore, which the banks did not respond to. Further, the bank by using the power of the SARFAESI Act coerced the guarantor to pay Rs 1.05 crore to get the mortgaged property released or else, he was warned, physical possession would be taken of it.


Compare this to the case mentioned above where the banks bent backwards to accommodate an influential person. Simultaneously, the banks neither informed the guarantor nor the Debt Recovery Tribunal of discharge of guarantee purposely to keep pressurising the guarantor to pay up. This shows complete discrimination by banks between an influential person and a common man.

Read Also: Searching for Roots

It is an unfair world, all right

.—The writer is an advocate in the Delhi High Court

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