The Hindu Business Line : Banks advised to go for out-of-court settlements

BANKS should try to enter into out-of-court settlement with defaulters, as far as possible, Mr Justice A.R. Lakshmanan of the Supreme Court of India, said here today.

The process of getting a decree takes a long time and even if a bank obtains a decree in its favour, it usually encounters difficulties in executing the decree. And, even then, it is usually a distress-sale of the seized asset, which may not fetch a good price in the market. Therefore, it is better that the bankers settle to a compromise with the defaulters, the Judge said.

Mr Lakshmanan was speaking here at the Centenary year celebrations of the City Union Bank, which is headquartered here.

He said that it was a common misconception that if a defaulter dragged a bank to the court, the court will necessarily award a decree based on a 6 per cent interest rate. Only for the period that the litigation was in the courts, the law gave the judge powers to award concessional interest rates.

However, in the period up to the matter was taken to the court and in the period between the decree and the actual repayment of dues, only the contracted rate of interest would apply.

On the other hand, he said that banks should charge a "reasonable interest" only, and not keep on adding the interest portion to the dues, even after the loan became a non-performing asset. Mr Justice Lakshmanan also issued a stern warning to those who issued cheques and let them bounce. He pointed out that Parliament had recently brought in an amendment to the Negotiable Instruments Act raising the punishment to the offenders from one year's imprisonment to two years. This was done to "protect the credibility of cheques as an alternative to payment in money." The courts, he said, would be very strict with the offenders.

Speaking on the occasion, the former President of India, Mr R. Venkataraman, advised the banks not to lend on the basis of the security offered, but on the basis of the viability of the project for which the loan was being sought. He wanted banks to take a "positive approach" and a mindset to help their clients out of their difficulties.

Former chairman of the Insurance Regulatory and Development Authority, Mr N. Rangachari, said that banks should never lose their human touch, no matter how automated their operations were.

The City Union Bank, which kicked-off its centenary year celebrations here on Saturday has chalked out plans to double its business every three years, increase its geographical spread and network its 125-odd branches.

Its Chairman, Mr V. Narayanan, said that the bank's capital adequacy being high and shareholding widespread, there was neither a need nor a threat of a takeover by another bank.

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