2018 (4) TMI 681 - AT - FEMA

Bank penalized for violating FERA and FEMA regulations by misusing NRNR deposits as loan security.

Oriental Bank of Commerce Versus The Joint Director Directorate of Enforcement, Mumbai

The Appellate Tribunal found Oriental Bank of Commerce (OBC) in violation of FERA and FEMA regulations by treating NRNR deposits as primary security ... Violation of FERA - lending against the deposit without taking any primary security - Held that:- Bank had lent money against the security of deposits in the NRNR accounts. There was no bar in such type of lending as is apparent from the RBI’s Notification. The bank was required to comply with the condition attached to such lending as prescribed by the RBI under the FERA/FEMA. One such condition was that the bank could grant loan facilities to resident individuals, firms, companies in India against the collateral of such fixed deposits. In spite of the aforesaid conditions of granting loans against collateral security of such deposits the bank continued to grant loans to the resident individual (third parties) treating them as primary security. Understood that the assets created out of the proceeds of the loan could only be the primary security and not the deposits in the present case. Thus, the action of the bank in lending against the deposit without taking any primary security was not in consonance with the provisions of the Act. Details as enumerated at para 5 supra, proves the violation of FERA. RBI’s suspension of the said account also point towards the wrong doing. Banks are expected to act as trustees of public money rather than misusing the powers granted by the regulators thereby facilitating abuse of the Act by unscrupulous persons. The appellant bank therefore cannot be absolved of the charges against it. Issues:1. Whether the bank violated provisions of FEMA and RBI notifications by treating NRNR deposits as primary security instead of collateral security.2. Whether the bank complied with conditions attached to lending against fixed deposits in NRNR accounts.3. Whether the bank acted as a trustee of public money and adhered to regulations.Analysis:1. The appeal before the Appellate Tribunal involved the Oriental Bank of Commerce (OBC) against an order alleging violation of FERA and FEMA by treating NRNR deposits as primary security for loans. The bank argued that the deposits were collateral security, not primary. The Tribunal analyzed the definitions of primary and collateral security, concluding that the NRNR deposits were indeed primary security, breaching RBI regulations. The bank's actions were found to create an indirect foreign exchange consideration without RBI permission, leading to the dismissal of the appeal and a reduced penalty of Rs. 15 lakhs.2. The Tribunal scrutinized whether the bank complied with RBI conditions for lending against fixed deposits in NRNR accounts. Despite RBI permissions for such lending, the bank failed to take primary security against the loans granted, contravening FERA regulations. The Tribunal emphasized that assets created from loan proceeds should serve as primary security, not the deposits themselves. The bank's non-compliance with RBI conditions and the subsequent suspension of the account reinforced the finding of wrongdoing, resulting in the rejection of the appeal.3. In assessing the bank's role as a trustee of public money, the Tribunal highlighted the bank's responsibility to act in accordance with regulations and prevent misuse of powers. By granting loans against NRNR deposits without proper security, the bank facilitated potential abuse of the Act. The Tribunal held the bank accountable for its actions, emphasizing the importance of upholding regulatory standards and acting as custodians of public funds. Consequently, the appeal was dismissed, and a penalty of Rs. 15 lakhs was imposed, underscoring the bank's obligation to adhere to regulatory requirements and act in the public interest.