The Reserve Bank of India’s master circular of 2008 instructing banks on the actions to be taken by them on wilful defaults like a borrower diverting the funds borrowed or not keeping up his commitments despite having the ability to do so apply as much to non-fund-based financial assistances as they do to fund-based assistances.
In a seminal judgment disposing of three similar cases — Kotak Mahindra Bank Ltd vs Hindustan National Glass and Industries Ltd and Others; Emcure Pharmaceuticals Ltd and Another vs ICICI Bank Ltd and Others; and Finolex Industries Ltd and Another vs Reserve Bank of India and Others — the apex court refused to give a narrow interpretation to the words lender and borrower to mean just fund-based transactions as done by the Calcutta High Court.
It pointed out that off-balance-sheet transactions such as guarantees, currency swaps and options vitally affect the financial health of the banking system, the mischief that the master circular seeks to address and remedy.
The court brushed aside the plea that off-balance-sheet transactions such as guarantees and swaps are strictly between the bank and its client and hence confidential, and do not come within the RBI’s regulatory oversight. It pointed out that the RBI’s powers to regulate and seek information extend as much to non-fund based activities of the banking system as they do to fund-based activities.
(The author is a New Delhi-based chartered accountant.)