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With the Supreme Court (SC) ruling that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act is applicable to co-operative banks, these banks will be encouraged to pursue recoveries of long pending dues with renewed enthusiasm and reduce their non-performing assets (NPAs).
According to Jyotindra Mehta, President, National Federation of Urban Co-operative Banks and Credit Societies (NAFCUB), SARFAESI Act is a particularly valuable tool for cooperative banks, as their loan ticket size is smaller than that of commercial banks and the cost of protracted litigation many a time becomes disproportionately high.
“The judgment has come as a great relief for the 1,540 urban cooperative banks, as a very large number of borrowers, who were wilful defaulters, were taking advantage of the ambiguity in interpretation of the SARFAESI Act by various courts and were not returning the loan amounts for years,” Mehta said.
“I am sure this development will have a positive impact on the morale of urban co-operative banks, many of whom would reduce their NPAs and become stronger in a short period of time,” he added.
Hurdle removed
Mehta emphasised that many borrowers, particularly in the personal loans segment, regularise the accounts once notice under the SARFAESI Act is served on them by the banks. Therefore, the non-availability of such an effective legal tool to cooperative banks all these years was a big handicap for them.
The NAFCUB, in a statement, said a government order for inclusion of multi-State cooperative banks under the SARFAESI Act was challenged by borrowers in different States, and many high courts had given conflicting judgments over the years, each of which landed up in the Supreme Court.
They were heard by different benches and finally it was included as one of the matters to be heard by a Constitution Bench that was set up to hear other constitutional matters.
Judgment
The five-judge SC Bench, comprising Justices Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose, emphasised that the co-operative banks under the State legislation and multi-State co-operative banks are ‘banks’ under section 2(1)(c) of SARFESI Act,2002.
Recovery is an essential part of banking; as such, the recovery procedure prescribed under Section 13 of the SARFAESI Act, a legislation relatable to Entry 45, List I of the Seventh Schedule to the Constitution of India is applicable, the Court ruled.
“The Parliament has legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution of India to provide additional procedures for recovery under Section 13 of the SARFAESI Act, 2002, with respect to co-operative banks.
“The provisions of section 2(1)(c)(iva) of SARFESI Act,2002, adding “ex abundanti cautela” (out of abundant caution), ‘a multi-state co-operative bank’ is not ultra vires (beyond the legal power) as well as the notification dated January 28, 2003 issued with respect to the co-operative banks registered under the State legislation,” the judgment said.
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