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The Hon’ble Chief Justice of THE SUPREME COURT OF INDIA under CIVIL APPELLATE / ORIGINAL JURISDICTION Civil Appeal No. 7300 of 2022 in the matter of State Bank of India & Ors (Appellants) Versus Rajesh Agarwal & Ors (Respondents) along with other appeals delivered an historical judgment which may open up a Pandora’s Box with regard to the implications of principles of natural justice. The issue involved in the appeal was whether the principles of natural justice should be incorporated while considering RBI direction on dealing with ‘FRAUD’ (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016. The Hon’ble Apex Court believes, “we hold that the principles of natural justice, particularly the rule of audi alteram partem, has to be necessarily read into the Master Directions on Frauds to save it from the vice of arbitrariness. Since the classification of an account as fraud entails serious civil consequences for the borrower, the directions must be construed reasonably by reading into them the requirement of observing the principles of natural justice” The operational part of the order is, “Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness”

The judgment raises a pertinent point whether it is time to review of the bank recovery Acts to judge how the principles of natural justice is being implemented and make changes, if necessary, as has been done in the aforesaid judgment.

The basic two most important tenets of the principles of natural justice are “No one can be a judge in his own cause (‘Nemo debet essa judex in propria cause’) and “Hear the other side.” (‘Audi Alteram Partem’). Section 22 of RDB Act states DRT and DRAT are guided by principles of natural justice but are they being followed really? There are very many instances where the said principles are thrown in to the dustbin.

Who is the authorised officer under SARFAESI Act? The authorised officer {Refer section 2 (a) of The Security Interest (Enforcement) Rules, 2002) is constitutionally created post even though he is an employee of the secured creditor to hear the representation and objections submitted by the aggrieved borrower of his bank under section 13 (3A) of SARFAESI Act. Is it not a contravention of the principles of natural justice as per the tenet “No one can be a judge in his own cause (‘Nemo debet essa judex in propria cause’)?

Who is the ‘resolution professional’ under IBC? Section 9 (4) of IBC states, “An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional” and under section 17 of IBC states that management of affairs of corporate debtor is to be managed by interim resolution professional until a regular resolution professional is appointed. . Is it not an infringement of the principles of natural justice?

When the secured creditor approaches the District Magistrate / Chief Metropolitan Magistrate with their application cum affidavit containing 9 important points under section 14 of SARFAESI Act, is the borrower given a chance to be heard by the DM or CMM as the case may be?

When the borrower brings to the notice of the DRT or DRAT regarding the various wrong doings and unbecoming acts of the banks, do DRT and DRAT take cognisance of such acts of banks in spite of furnishing unflinching evidences produced before the Tribunal?

Statement of objects and reasons of passing SARFAESI Act was that there were “certain areas in which the banking and financial sector did not have a level playing field as compared to other participants in the financial markets in the world”. Hence, SARFAESI Act was brought in to facilitate a level playing field for banks and financial institutions. But was such a level playing field provided to borrowers?

There is a general feeling prevailing among the aggrieved borrowers undergoing legal proceedings to recover their dues even when unflinching evidences are being brought out to show how the systems are being misused and abused but to no avail and the Tribunals, rightly or wrongly, seem to become the collection agents of the bank.

Whether the banks and financial institutions comply with RBI guidelines as per RBI circular on compliance function?

  • In this connection a reference be made to Banking Regulation Act under section 35A (Power of RBI to issue directions to banks) section 35AA (Power of Central Government to authorise RBI for issuing directions to banking companies to initiate insolvency resolution process) and section 35AB (Power of RBI to issue directions in respect of stressed assets), read along with section 46, (Penalties), 47 (Cognizance of offences), 47A (Power of Reserve Bank to impose penalty) and a dispassionate and unbiased view without prejudice is taken, it will reveal the noncompliance of RBI directions is rampant among banks and financial institutions. Many of the banks are habitual offenders and RBI has penalised banks regularly for noncompliance of their guidelines.

There are three steps to be undertaken by the banks to recover their dues from the defaulted borrowers before classification of account as NPA.

  • Prevention of slippage of Non-performing accounts as enumerated under RBI circular dated 12.09.2002 issued after the implementation of SAEFAESI Act in June 2002.

  • Gazette publication issued by Ministry of MSME Government of India dated 29.05.2015 on steps to be taken before classification of account as NPA by banks.

  • RBI issued a circular dated August 7, 2004 The Chief Executives All Commercial Banks on deficiencies found in sanctioning of loans and monitoring of borrowal accounts by banks / Financial Institutions particularly on the appraisal and assessment of loan sanction and the deficiencies continue unabated even today.

  • Ensuring provision under Section 31 (Provisions of this Act not to apply in certain cases) of SARFAESI Act to be strictly complied with. But are they?

  • Ensuring that the provision under section 26 E of SARFAESI Act is faithfully complied with.

  • Ensuring that the compliance of one of the most important RBI circulars issued from time to time on Fair Practices Code for Lenders particularly the code “Terms and conditions and other caveats governing credit facilities given by banks/ financial institutions arrived at after negotiation by lending institution and the borrower should be reduced in writing and duly certified by the authorised official. A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement should be furnished to the borrower.” Are the borrowers given an opportunity to negotiate and arrived at the terms and conditions of sanction and to be reduced in writing and duly certified by the authorised official of the bank? Most of the sufferers are from the MSME sector, individuals, professionals and those who have availed housing loans and education loans etc.

  • Non-compliance of RBI guidelines galore and the banks get away with impunity.

  • Are the borrowers get any reliefs under debts recovery laws or from the Tribunals or Courts or both? Only in the rarest of rare cases. Otherwise the answer is a ‘NO’.

RBI circulars on ‘FRAUD’ should be read along with RBI circulars on ‘WILFUL DEFAULTERS’ and the Apex Court has taken note of the infringement of principles of natural justice by the banks and it can the beginning of a course correction. Better late than never. It may take extensive analysis of how the banks misuse and abuse the power given to them under various debts recovery laws. The legal system and the government approach towards recovery of bank debts are pro bank and considering the fact that there is an implicit bias towards borrowers, all efforts should be taken to make the recovery process more humanistic.

In the ultimate analysis the basic rule should be The ‘Recovery with human touch’ and the method is based on the fact that it takes considerable time to build and it takes no time to destroy. Considering the roles of the banks and that of the borrower, any wrong step that the bank makes either to lend or to recover would certainly affect the borrower and vice versa any erroneous path that the borrower takes would also affects the bank since their existence are interdependent and not independent. Any weakening of the banking system is detrimental to the economy of the nation and so also any adverse features inflicted on the entrepreneur organization would also affect the contribution to the welfare of the society and deprive the livelihood of the multitude of the employees and workers engaged by the enterprise and also other stake and shareholders besides affecting the GDP. Hence, the principle behind ‘Recovery with Human Touch’ is that any recovery process being adopted should not jeopardize the existence of both the lender and the borrower aiming only to reconstruct and not to destroy. In the ultimate analysis, the veritable realization of the organizational objectives and individual aspirations for banks and enterprises depend upon the following principle: “In management, the first concern of the company is the happiness of the people connected with it. If the people do not feel happy and cannot be made happy, that company does not deserve to exist.”

What is needed most in the process of recovery? There is vast difference between knowing the customer and understanding the customer and hence more importantly new UYC (Understand Your Customer) norms are to be formulated in line with Banking Codes and Standards adopted by banks. The next step is to understand and accept the harsh realities and unpleasant truth regarding the prevailing situations in their correct perspectives by the bank and the borrower which may lead to a change of norms in the classification of the account as NPA. The initial two aforesaid steps are very important

because Understanding is the first step to acceptance, and only with acceptance can there be recovery with a human touch.

“The human relationship is purely based on the power of communication. If only we can understand each other well, it would have served the purpose of human welfare and wellbeing without any conflict of interest and misunderstanding.” An attitudinal and corresponding aptitudinal changes are necessary with regard to the recovery of debts so as to initiate a different pathway for the veritable realisation of the objective of ‘Recovery with a human’ touch. It may be difficult but it is not impossible. “If there is a will, there is a way”.

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