Non Performing Assets

Topics: Bank, Finance, Bank regulation Pages: 6 (1954 words) Published: February 11, 2012
Transfer of Non-Performing Assets between Banks and Beyond

Niloy Pyne comments on the recently issued ruling of the Supreme Court, in the case of ICICI Bank Limited Versus Official Liquidator of APS Star Industries Ltd. & Ors. on whether non-performing assets (NPAs) can be transferred between banks without the concurrence of the borrowers.


This case involved a transfer of Non Performing Assets (NPAs), relating to the borrower, APS Star Industries Ltd., from ICICI Bank to Kotak Mahindra Bank. The borrower was a company in liquidation. Upon the Assignee, Kotak Mahindra Bank seeked to substitute its name in place of one of the erstwhile creditors being ICICI, the Assignor of the debt, before the Company Court and that  the borrower objected on several grounds, including the insufficiency of the stamp duty paid on the instrument of Assignment. The Company Court refused to recognize the Assignee on account of improper presentation of the document of transfer. On appeal, a Division Bench of the Gujarat High Court upheld the Company Court’s decision, but on a different ground, being that the assignment of debts by banks is not an activity permissible under the Banking Regulation Act, 1949. On further appeal, the Supreme Court considered chiefly two issues, which were, whether inter se transfer of debts between banks is an activity permissible under the Banking Regulation Act, 1949 and whether the Assignee Bank is entitled to substitution in place of the original lender / Assignor in proceedings relating to liquidation of the borrower company.

Assignment of debts and the Banking Regulation Act, 1949

Considering the issue whether the inter se transfer of debts between banks is permissible, the Court examined in detail the scheme and provisions of the Banking Regulation Act, 1949 and concluded that assignment of NPAs is within the purview of a bank’s permitted business activity. According to the Supreme Court, the Reserve Bank of India (RBI) can lay down parameters enabling banking companies to expand its business; apart from accepting deposits and lending, The Banking Regulation Act, 1949 leaves ample scope for banks to venture into new businesses being subject to the control of RBI. Further, section 6(1) (n) of the Banking Regulation Act, 1949 enables “a banking company to do all things that are incidental or conducive to promotion or advancement of the business of the company”. The Guidelines on Purchase/Sale of NPAs dated 13 July 2005 issued by the RBI allow banks to deal inter se in NPAs, which makes the activity a bona fide business. After going into the rationale for declaring a loan as an NPA, the Court went on to hold that the guidelines were issued as a restructuring measure in order to avoid setbacks in the banking system. The sale of NPA s is indeed profitable given that it is economically viable for the banking system and works positively in the interest of monetary stability or economic growth, keeping in mind the interest of the depositors and optimum employment of their deposits. The Supreme Court, after analyzing the provisions of the Banking Regulation Act, 1949, held that the issue in question in this regard appeared to be whether trading in NPAs has the characteristics of a bona fide banking business. In case, trading in NPA s fell within the scope of bona-fide banking business, there is no provision of law barring the same. Sections 21 and 35A of the Banking Regulation Act, 1949 empower the RBI to issue various guidelines determining the policy in relation to advances to be followed by banking companies. The guidelines issued by RBI authorizing banks to deal inter se in NPAs have a statutory force of law. They have allowed banks to engage in trading in NPAs with the purpose of clearing the balance sheets and raising the capital adequacy ratio. These activities comes within the ambit of Section 21 of the Banking Regulation Act, 1949 which enables the RBI to frame the policy in...
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