2014 (12) TMI 1251 - HC - Indian Laws

Court Upholds RBI's Master Circular, Bank Can Declare Defaulters

The court held that the Master Circular issued by the Reserve Bank of India is binding on banks and financial institutions. It determined that the ... Eligibility of Master Circular on Wilful Defaulters issued by the Reserve Bank of India - whether is not a piece of subordinate legislation and, therefore, it is not binding on a bank carrying on banking business in India? - Held that:- Master Circulars being issued under Section 35A of the Banking Regulation Act, 1949 are binding upon the banks and financial institutions carrying on banking business in India Number prescribed for constituting the Identification Committee and the Grievance Redressal Committee in Regulations 3(i) and 3(iii) of the Master Circular dated July 1, 2014 is mandatory. The Master Circular on Wilful Defaulters of the Reserve Bank of India requires every bank to undertake the exercise of identifying and declaring a borrower as a wilful defaulter if he is so. This exercise should be undertaken independent of the view expressed by a member bank of the consortium or any other bank. This is so as the account of the borrower has to be adjudged under the Master Circular in relation to the transactions that the borrower had with the concerned bank. Once a borrower is declared to be a wilful defaulter by a bank, the rigours under the Master Circular would kick in. Non-declaration of wilful defaulter even after an enquiry to such effect under the Master Circular being undertaken by a bank will not bind any other bank with such view as a borrower has to be adjudged as a wilful defaulter in relation to the transactions that the borrower had with the considering bank. Viewed in such context the letter of State Bank of India is of little consequence. In fact, State Bank of India is required to undertake the exercise under the Master Circular also notwithstanding its letter. The letter is not by the Grievance Redressal Committee of State Bank of India. The Master Circular requires the banks and financial institutions to undertake such exercise expeditiously and to report on the same so that a wilful defaulter is dealt with in a manner commensurate with its status. Therefore, every individual banker under the consortium will be entitled to proceed and deal with the writ petitioners under the Master Circular notwithstanding the contents of the letter date January 31, 2012 of the lead banker. The letter dated January 31, 2012 will not impede State Bank of India itself to invoke the provisions of the Master Circular. Such letter, therefore, by no stretch of imagination can be held to impede the invocation of the Master Circular by other members of the consortium. This will not prevent the United Bank of India to proceed against the writ petitioners to classify them as wilful defaulters under the relevant Circulars of the Reserve bank of India in accordance with law and in terms of the orders passed in the earlier writ petition. Issues Involved:1. Binding nature of the Master Circular of Reserve Bank of India on banks and financial institutions.2. Mandatory or directory nature of the number of 'higher functionaries' constituting the Identification Committee and the Grievance Redressal Committee.3. Legitimacy of the Bank of India's proceedings to declare the petitioners as wilful defaulters in light of the letter dated January 31, 2012, from the State Bank of India.Issue-Wise Detailed Analysis:1. Binding Nature of the Master Circular:The court examined whether the Master Circular issued by the Reserve Bank of India (RBI) on July 1, 2013, and updated on July 1, 2014, is binding on banks and financial institutions. The petitioners initially contended that the Master Circular lacked statutory force but later conceded that it is a piece of subordinate legislation under the Banking Regulation Act, 1949. The court concluded that the Master Circular, issued under Section 35A of the Banking Regulation Act, is binding on banks and financial institutions. This conclusion was supported by authoritative pronouncements from the Supreme Court, which confirmed that directives issued by the RBI under Sections 35A and 21A of the Banking Regulation Act have statutory force and are binding on banks.2. Mandatory or Directory Nature of the Number of 'Higher Functionaries':The court considered whether the prescribed number of 'higher functionaries' in the Identification Committee and the Grievance Redressal Committee, as specified in Regulations 3(i) and 3(iii) of the Master Circular, is mandatory or directory. The Master Circular requires the Identification Committee to consist of an Executive Director and two General Managers/Deputy General Managers, and the Grievance Redressal Committee to be headed by the Chairman and Managing Director, along with two other senior officials. The court held that these numbers are mandatory, rejecting the argument that the numbers are merely directory. The court emphasized that allowing banks to exceed the prescribed numbers would lead to uncertainty and potential discrimination among borrowers. Consequently, the court found that the decision-making process in the instant case was vitiated because both the Identification Committee and the Grievance Redressal Committee were constituted with four members, exceeding the mandatory number prescribed by the Master Circular.3. Legitimacy of Proceedings in Light of the Letter from State Bank of India:The court addressed whether the Bank of India could initiate proceedings to declare the petitioners as wilful defaulters despite the letter dated January 31, 2012, from the State Bank of India. This letter requested the RBI to relax restructuring guidelines to facilitate the restructuring of the accounts of Kingfisher Airlines Limited (KAL). The court held that the letter did not negate the requirement for individual banks to consider the petitioners as wilful defaulters under the Master Circular. The court emphasized that each bank in the consortium has the right to independently undertake the exercise of identifying and declaring a borrower as a wilful defaulter, based on the borrower's transactions with that specific bank. The court concluded that the letter from the State Bank of India did not impede United Bank of India or any other member of the consortium from invoking the provisions of the Master Circular to classify the petitioners as wilful defaulters.Conclusion:The court quashed the decisions of the Identification Committee and the Grievance Redressal Committee, finding that they were constituted in violation of the mandatory requirements of the Master Circular. The court allowed the writ petition to the extent of quashing these decisions but clarified that this does not prevent United Bank of India from proceeding against the petitioners to classify them as wilful defaulters in accordance with the relevant RBI Circulars and the law.