Bank-to-bank NPA assignments vs "trading" ban under BR Act: transfers upheld, not illegal trading

Whether inter se transfer/assignment of NPAs by banks is impermissible "trading" under the BR Act, 1949 was the dominant issue. The SC held the BR Act is a complete code governing banking, read with RBI directions on advances and NPA management, and the assignment of a bank's account receivables constitutes transfer of rights/benefits, not delegation of contractual obligations to the borrower; any "obligations" in the assignment deed operate only inter se between assignor and assignee to ensure RBI-guideline compliance. The SARFAESI Act does not impliedly bar bank-to-bank transfers. Consequently, the HC view treating such assignments as illegal was set aside and the assignment upheld.

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Issues: (i) Whether inter se assignment/transfer of Non-Performing Assets (NPAs) by banks is permissible under the Banking Regulation Act, 1949 and related RBI guidelines.

Analysis: The Banking Regulation Act, 1949 provides an open-ended framework for banking business: section 2 preserves other laws except where the BR Act expressly provides otherwise; section 5 defines banking and banking company; section 6(1) lists forms of business a banking company may engage in including activities incidental or conducive to banking business (clauses (a), (g), (l), (n)); sections 8 and 9 impose limited prohibitions relating to trading and non-banking assets. Sections 21 and 35A empower the Reserve Bank to determine policy in relation to advances and to issue directions binding on banks. RBI's Guidelines dated 13-7-2005 on purchase/sale of Non-Performing Financial Assets were issued under these statutory powers and authorize banks, financial institutions and NBFCs to purchase/sell NPAs inter se (excluding securitisation/reconstruction companies). The correct test is whether dealing in NPAs has the characteristics of bona fide banking business and falls within powers conferred by the BR Act and RBI's delegated policy-making. Assignment of account receivables (NPAs) transfers the bank's proprietary asset (the debt) and related security rights; it does not, without novation, transfer the assignor's contractual obligations to the borrower. The SARFAESI Act supplies a mechanism for securitisation/reconstruction but does not exclude banks from transferring their own financial assets inter se when such transfers fall within RBI policy and the BR Act framework.

Conclusion: Assignment/transfer of NPAs inter se between banks is permissible under the Banking Regulation Act, 1949 read with RBI's guidelines (including the Guidelines dated 13-7-2005); the High Court's conclusion that such inter se assignments are impermissible is set aside.

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