Banks

Recovery of Debts/Non-Performing Assets (NPAs)

— Writing-off of NPAs — Autonomy of banks in respect of — Adverse inference against bank on writing-off NPAs — When warranted — Role of RBI — R-6 Bank writing-off NPAs of Rs 120 crores and appropriating the said amount from its general reserves for the said purpose — Bank seeking permission of RBI to do so, even though it was under no legal obligation to do the same — On RBI granting permission, appellant shareholder of Bank alleging that RBI had illegally approved proposal of Bank — Sustainability — Held, writing-off of NPAs is an internal accounting procedure of banks and does not require permission of RBI — Banks do not have any legal obligation to even report the appropriation of reserves other than from the statutory fund to be maintained under S. 17, Banking Regulation Act, 1949 — Even then R-6 Bank sought permission from RBI by way of abundant caution (as per the established practice of banks in this respect) for setting-off the said NPAs against its general reserve — Only because some debts have become bad, it cannot be concluded that there is lack of proper management of the bank concerned, or that its conduct is dishonest or mala fide — In absence of evidence of lack of proper management or dishonest conduct, adverse inference cannot be drawn against the bank concerned — Risk of debts turning bad is inherent in the banking business — Nature of banking business, discussed — In the present case, RBI considered the relevant financial factors before granting its approval — Said financial factors, discussed — Profit/loss account and balance sheet of R-6 Bank after taking into account the said write-off were approved by an overwhelming majority of R-6 Bank's shareholders at the AGM — There is no material whatsoever to demonstrate that RBI has failed to exercise its powers under S. 21, Banking Regulation Act, 1949 or that it committed breach of any statutory provision or acted illegally or arbitrarily in the matter, or that R-6 Bank had not followed any policy determined by RBI under S. 21 — Further, it was not as if R-6 Bank had entirely given up on realising the dues from the debtors in respect of written-off bad debts, though the amounts recovered over the years did not seem very impressive — Lastly, writing-off bad loans gives some benefit to the bank under income tax laws — Hence challenge of appellant is not sustainable, (2006) 5 SCC 302-A

Banks

Recovery of Debts/Non-Performing Assets (NPAs)

— Writing-off of NPAs — Nature of procedure — Effect of, and benefits to bank therefrom — Effect on right of the bank to proceed against borrowers of the written-off debts — Held, a write-off does not affect above right of the bank — Legal proceedings initiated by the bank to recover the loans or to enforce the security against borrowers whose debts have been written-off may continue even after the write-off, (2006) 5 SCC 302-B

Banks

Banking Regulation Act, 1949

— S. 17 — Statutory reserve fund to be maintained under — Obligations of bank when making appropriation from such fund — Held, banks do not require prior approval of RBI for making an appropriation, though there is a statutory obligation on banks to report any appropriation to RBI within the specified period, (2006) 5 SCC 302-C

Banks

Banking Business

— General reserves (other than statutory reserve under S. 17, Banking Regulation Act, 1949) — Appropriation from — Autonomy of banks in respect of — Held, banks have neither any obligation to seek permission nor report any appropriation from their general reserves, though as a matter of (established) practice banks do approach RBI for permission before utilising their reserves for writing-off bad debts, (2006) 5 SCC 302-D

Banks

Banking Regulation Act, 1949

— Ss. 22(4), 27, 30, 35, 35-A, 36, 36-AA and 45 — Grant of approval by RBI to bank to write-off its bad debts/non-performing assets — Irrelevance of said sections in respect of, clarified, (2006) 5 SCC 302-E