Nanji Vs. Union of India & Ors  Insc 301 (11 May 2006)
P. Singh & Altamas Kabir B.P. Singh, J.
appeal by special leave has been preferred against the judgment and order of
the High Court of Judicature at Bombay dated September
18, 2003 in Writ
Petition No.2199 of 2003. The High Court by its impugned judgment and order
dismissed the writ petition preferred by the appellant holding that the issues
raised by the appellant in the writ petition were not justiciable in writ
appellant has appeared before us in person and argued his appeal.
claims to be a shareholder of the Development Credit Bank Ltd.
No.6 herein. In sum and substance, the grievance of the appellant in the writ
petition was that the Reserve Bank of India being the statutory and regulatory
authority, illegally approved the proposal of the Respondent No.6 Development
Credit Bank Ltd. for writing off of debts, amounting to Rs.120 crores, of the
Bank without following the proper procedures prescribed under the provisions of
Sections 13 and 14 of the Securitisation Act, 2002 and Sections 19 and 31A of
the Recovery of Debts Due to Banks Act, 1993.
appreciate the grievance of the appellant it is necessary to notice the
background in which the controversy arises.
On February 19, 2003, Respondent No.6 Bank made a
request to the Reserve Bank of India to grant
permission and allow the Bank to write off from its financial records, debts
that had turned non-performing assets over the years amounting to Rs.120 crores.
It was stated in the letter of request, that to institute better balance sheet
management and a tighter control environment, the Board of Directors and the
principal shareholders of the Bank in France had approved the bank's strategy to write off these debts, subject to
approval of the Reserve Bank of India. The Bank had taken necessary steps to recover the dues and will
continue to take follow up action, but there appeared no prospect of early
recoveries from some of these accounts. The Bank did not expect to generate
enough profits to absorb the write off and, therefore, sought permission to
allow the write off from the amount lying as General Reserve in the books of
the bank as on March
31, 2003, and not from
the operating income for the year. It was assured that the Bank was estimated
to show capital adequacy well above the minimum limits as prescribed by the
Reserve Bank of India even after the amount is
transferred for write off. The Bank brought to the notice of the Reserve Bank of
India that it had inducted fresh equity
capital of Rs.21 crores. The Bank was also actively considering raising
subordinated debt amounting to Rs.75 crores to further augment its capital base
during the year. It also referred to various other steps being taken to
increase its capital base. The letter also refers to the recommendations of
M/s. Mekinsey & Co. and the decision of the Board of the Bank to act on its
recommendations. In the above background, the Bank sought approval of the
Reserve Bank of India to write off an amount of Rs.120 crores
from its General Reserve, consequent upon writing off debts to the tune of
Reserve Bank of India by its communication of March 3, 2003 responded to the request of the
Respondent No.6 Bank and advised the Bank that it may utilize Rs.120 crores
from the "Revenue & Other Reserves" to write off the debts that
have turned NPAs. The drawal should be "below the line" after
arriving at the net profit/loss for the year ended March 31, 2003 on the basis of accepted accounting policies duly approved
by the banks Auditors. The above adjustment should be prominently disclosed in
the Notes to Accounts.
grant of approval by the Reserve Bank of India, the Annual General Meeting of the Company was held on September 30, 2003 and the write off of the bad debts
was approved by the shareholders of the Respondent No.6 Bank.
counter affidavit filed on behalf of the Reserve Bank of India before this Court, it has been
stated that the Board of Directors of the Respondent No.6 Bank and its
principal shareholders approved the proposal to write off these debts by
appropriating the reserves subject to receiving approval from the Reserve Bank
of India. Referring to Section 17(1) of the
Banking Regulation Act, 1949, it was explained that every banking company
incorporated in India must create the reserve fund and shall out of the balance
of profit of each year as disclosed in the profit and loss account prepared
under Section 29 of the Act, and before any dividend is declared, transfer to
the reserve fund a sum equivalent to not less than 20% of such profit. The said
limit was raised to 25% in December 1974. In terms of Section 17(2), a banking
company can appropriate sums from the reserve fund or the share premium account,
and the same must be reported to the Reserve Bank of India within 21 days explaining the
circumstances relating to such appropriation. This implies that appropriation
of the statutory reserve fund does not require the Reserve Bank's prior
approval though there is a statutory obligation on banks to report
appropriation to the Reserve Bank of India. The appropriation of other reserves does not cast any obligation on
banking companies to report to the Reserve Bank. However, as a matter of
practice, the banking companies are approaching the Reserve Bank for permission
before appropriating their reserves for writing off the bad debts. The Reserve
Bank considers the financial position of the applicant banking company before
granting permission to utilize the reserves for the purpose.
with the facts of this case, it was averred that the Respondent No.6 Bank had
earned a net profit of Rs.34.05 crores during the financial year 2001- 02 and
transferred Rs.8.55 crores to statutory reserve and Rs.0.30 crore to investment
fluctuation reserve. The gross and net NPAs of Respondent No.6 Bank were
Rs.215.45 crores and Rs.149.33 crores respectively as on March 31, 2002. The Capital to Risk-weighted
Assets Ratio (CRAR) was at 11.49% as on March 31, 2002. Even after the amount was
transferred from the reserves for write off as on March 31,2003, the CRAR stood at 10.08%. which was above the minimum
prescribed CRAR of 9%. During the year 2002-03, an amount of Rs.21 crores has
been induced as fresh equity capital by the principal shareholders of the
banking company. After taking into consideration the above facts and the need
for cleansing the balance sheet of the Respondent No.6 Bank, the Reserve Bank
has allowed it to utilize Rs.120 crores from the revenue and other reserves to
write off debts that have turned NPAs, vide letter DBOD. No.PSBS.1036/16.01.
132/2002-03 dated March
further explained that the write off is an internal accounting procedure to
clean up the balance sheet of the Bank. Such write off is resorted to even in
cases where the Bank has not exhausted all the avenues for recovery of dues.
Such write off does not affect the right of the Bank to proceed against the
borrowers to collect the dues. The legal proceedings initiated by the Bank to
recover the loans or to enforce the security against the borrowers may
continue. The write off does not bar the Bank from following up recoveries.
Further recoveries, if any, in these accounts are credited to the income
account, in turn improving the net worth of the Bank.
to the Petitioner's allegation that the Reserve Bank had failed to exercise its
statutory powers and authority of law against the Bank under the various
provisions of the Banking Regulation Act, 1949 to restrain it from taking any
steps or acting in furtherance to write off the secured debts of the sum of
Rs.120 crores, which is detrimental to the interests of the Bank, its
depositors, investors and shares holders, it was submitted that the banking
companies do not need Reserve Bank's permission to write off bad debts.
mentioned earlier, the banking companies are also not under statutory
obligation to seek the Bank's approval for appropriation of sums from their
reserves. However, as a matter or practice, the banking companies do approach
the Reserve Bank for permission, before utilizing their reserves, for writing
off the bad debts and the Reserve Bank grants approval, if it is in order, on
considering their financial position and other related factors as stated above.
counter affidavit filed before this Court the Respondent No.6 Bank stated that
the dues from various debtors had necessarily to be shown as non-performing
assets (NPAs) as per the guidelines issued by the Reserve Bank of India. The Reserve Bank of India monitors the NPAs strictly and
during the periodical inspections, goes into the matter of NPAs in detail.
Reserve Bank of India had issued a circular letter dated July 28, 1995, and has
been issuing circulars/ directions/ guidelines from time to time prescribing
the manner in which NPAs could be categorized and where and how amounts should
be written off. Compliance of these guidelines is rigorously monitored by the
Reserve Bank of India at the time of periodic
inspections. The last such detailed periodic inspection by the Reserve Bank of India in the case of Respondent No.6 Bank
was conducted sometime in September, 2003 when all these and other matters were
gone into by the Reserve Bank of India.
further stated that Respondent No.6 Bank was negotiating with several reputed
foreign investors, including International Financial Corporation, Washington
(IFC), for a major infusion of capital into Bank.
foreign investors including IFC, Washington indicated to the Respondent No.6
Bank that they would very much like to see the Bank's balance sheet cleaned up
by writing off the NPAs and especially so because the Respondent No.6 Bank had
accumulated huge reserves which had been built up out of the profits earned by
the Bank since 1995. The write off of the amounts of NPAs against the reserves
of the Bank was therefore a book entry with the object of cleaning up the
balance sheet and without any prejudice to the Bank's right to continue with
the proceedings to recover the amounts from the debtors in question.
reiterated that the mere write off of a debt by the Bank did not require the
prior permission or subsequent approval of the RBI. However, if bad debt is to
be written off against the reserves, it is necessary for the Bank to intimate
the RBI. The normal practice being, however, to apply to RBI for approval, the
Respondent No.6 Bank had approached the RBI by its letter dated February 19, 2003. Thereafter, the Reserve Bank of India, by its letter dated March 3, 2003 granted approval for the write off
of the bad debts against the reserves of the Bank. It is also important to note
that the audited profit and loss account and the balance sheet of the Bank were
approved at the Annual General Meeting held on September 30, 2003 by an overwhelming majority of the shareholders, by
show of hands and the appellant was present in the said meeting. It was,
therefore, submitted that the write off of the bad debts has also the approval
of the shareholders of the Bank, and the same gives a true and fair view of
financial position of the Bank. Such write off is also pre-eminently in the
interest of the Bank and all its shareholders.
Bank has, further, explained that almost 80% of the NPAs/ bad debts relate to
the loans advanced to 15 parties. The particulars about these 15 parties and
the steps taken by the Bank to recover the amounts due, have been set out in
the counter affidavit which was filed in compliance of the order of this Court
dated July 5, 2004.
will thus appear from the facts noticed above that the writing off of NPAs is
an exercise undertaken to clean the balance sheet, and is an internal
accounting procedure. It does not require the permission of the Reserve Bank of
India but as explained by the Reserve
Bank of India, banks usually make such a request
as a matter of practice and permissions are granted by the Reserve Bank after
considering all relevant aspects of the matter. In the case where a banking
company appropriates sums from the reserve fund or the share premium account,
it is required to report to the Reserve Bank of India within 21 days explaining the circumstances relating to
instant case also since the Respondent No.6 Bank proposes to appropriate the
sums from their reserves, it sought by way of abundant caution the approval of
the Reserve Bank of India. There is, therefore, no
justification for the grievance that in granting approval to the bank to write
off its non-performing assests to the tune of Rs.120 crores, the Reserve Bank
of India committed breach of any statutory
provision or acted illegally or arbitrarily in the matter. There is not even an
allegation that the Reserve Bank of India acted on extraneous consideration, or that its action was mala- fide.
appellant submitted before us that writing off of Rs.120 crores would cause a
great loss to the Bank, because the sum of Rs.120 cores would be lost to the
bank. He submitted that it is not as if the loans cannot be recovered. In most
cases, securities are provided before loans are advanced. There are guarantors
against whom the Bank can proceed. In these circumstances, there was no
justification for the Bank to write off these debts.
submission proceeds on the assumption that the bad debts written off cannot be
recovered. In fact and in law it is not so. Despite writing off the debt is
still recoverable by the Bank. The affidavit filed by the Bank also discloses
the steps which are being taken to realize the dues from the debtor.
amounts have been recovered over the years though the figure does not appear
very impressive. Even so, steps are being taken to recover the dues whenever
possible and Respondent No.6 Bank has furnished particulars of the various
proceedings pending for recovery of such debts. The write off is only an internal
accounting procedure to clean up the balance sheet, and it does not affect the
right of the creditor to proceed against the borrower to realize his dues.
Moreover, it does give some benefit to the Bank under the Income Tax Laws
because after write off tax is payable only on the amount recovered as and when
recovery is made. In the guidelines issued by the Reserve Bank of India, it is observed :
off of NPAs In terms of section 43D of the Income- tax Act, 1961, income by
way of interest in relation to such categories of bad and doubtful debts as may
be prescribed having regard to the guidelines issued by the RBI in relation to
such debts, shall be chargeable to tax in the previous year in which it is
credited to the bank's profit and loss account or received, whichever is
stipulation is not applicable to provisioning required to be made as indicated
above. In other words, amounts set aside for making provision for NPAs as above
are not eligible for tax deductions.
the banks should either make full provision as per the guidelines or write-off
such advances and claim such tax benefits as are applicable, by evolving
appropriate methodology in consultation with their auditors/ tax consultants.
Recoveries made in such accounts should be offered for tax purposes as per the
appellant submitted before us that the Reserve Bank of India had failed to exercise the
statutory powers vested in it and therefore, it failed to perform a legal duty
cast upon it by law. The appellant was, therefore, entitled to invoke the writ
jurisdiction of the High Court for issuance of Writ of Mandamus to the Reserve
Bank of India to act in accordance with its
statutory obligations. In this connection, reference has been made to Sections
21, 22(4), 27, 30, 35, 35A, 36, 36AA, and 45 of the Banking Regulation Act,
21 of the Banking Regulation Act empowers the Reserve Bank to determine the
policy in relation to advances to be followed by banking companies generally,
or by any banking company in particular. The policy, if so, determined by the
Reserve Bank of India in public interest or in the
interest of depositors or banking policy, must be followed by all banking
companies. In the instant case there is no material whatsoever to demonstrate
that the Reserve Bank of India has failed to exercise its powers
under Section 21 of the aforesaid Act, nor is there anything to prove that the
Respondent No.6 Bank herein has not followed any policy so determined by the
Reserve Bank of India.
22 (4) of the aforesaid Act empowers the Reserve Bank of India to cancel a licence granted to a
banking company in the circumstances mentioned therein. We fail to understand
how the said provision is at all relevant since it is not the case of the appellant
that the licence granted to the Respondent No.6 Bank should be cancelled.
27 casts an obligation on every banking company to submit to the Reserve Bank a
return in the prescribed form and manner showing its assets and liabilities in
accordance with the aforesaid provision. The Reserve Bank is also authorized at
any time to direct a banking company to furnish it such statements and
information relating to the business or affairs of the banking company as it
may consider necessary or expedient to obtain for the purposes of the Act. We
fail to understand how Section 27 is at all relevant in the instant case
because it is not the case of the appellant, nor has any material being placed
on record to show, that there has been breach of Section 27 of the aforesaid
Section 30 which deals with audit of the balance sheet and profit and loss
account of a banking company by a qualified auditor is not at all relevant. SubSection
(1B) of Section 30 empowers the Reserve Bank to order a special audit. In the
instant case we are not concerned at all with the appointment of auditors.
35 relates to inspection of banking companies. It empowers the Reserve Bank to
cause an inspection to be made by one or more of its officers of any banking
company and its books and accounts.
36 enumerates the other powers and functions of the Reserve Bank. Similarly
Section 36AA empowers the Reserve Bank to remove from office any Chairman,
Director, Chief Executive Officer or other officer or employee of the banking
company, subject to the conditions laid down in that provision.
45 confers power on the Reserve Bank to apply to the Central Government for
suspension of business by a banking company and to prepare scheme of
reconstitution or amalgamation. We fail to appreciate how any of these
provisions is relevant to the issue that arises in the instant appeal. No
doubt, the Reserve Bank has been vested with wide powers to control and
regulate the functioning of banks. If need be, those powers may be exercised by
the Reserve Bank. In the instant case, we are only concerned with the writing
off of non-performing assets. Nothing has been produced on record to satisfy us
that the Reserve Bank has acted in breach of its legal obligations in the
matter of granting permission to the Respondent No.6 Bank to write off the
debts that have become non-performing assets.
appellant made a general submission that there was no justification for writing
off the bad debts amounting to Rs.120 crores.
No.6 Bank should have taken all necessary steps to recover the debts and to
enforce its rights under Sections 13 and 14 of the Securitisation Act, 2002 and
Sections 19 and 31A of the Recovery of Debts Due to Bank Act, 1993. The Bank
can proceed against the original security and the secured assets of the
borrowers and recover its dues. Writing off bad debts was detrimental to the
interest of a banking company.
no doubt true that amounts advance by banks must be recovered. Such debts
should not be permitted to become non-performing assets.
one cannot lose sight of the realities of the situation. Having regard to the
nature of banking business, it is possible that the Bank may commit an error of
judgment in advancing funds to a particular party or industry. It may be that
on account of other factors beyond its control, or even beyond the control of
the borrowers, it may become difficult, or even impossible to recover the loan
advanced in accordance with the schedule of re-payment, or to recover the loan
at all. These are risks inherent in the banking business, though a wise banker
with foresight and anticipation may reduce such risks to the minimum level. One
cannot however, jump to the conclusion that only because some of the debts have
become bad, there is lack of proper management of the Bank, or that the conduct
of the Bank is dishonest or mala-fide. In a given case, there may be evidence
of such mis- management or dishonest conduct, but in the absence of any such
accusation one cannot draw an adverse inference against the Bank. In the
instant case, though some of the debts have to be written off, with little
chance of substantial recovery, we cannot lose sight of the fact that the Bank
has generated considerable operating profits and has built up a substantial
general reserve over the years, against which the debts written off have been
therefore, find no merit in this appeal. The same is accordingly dismissed but
without any order as to costs.
(B. P. SINGH ) ..J ( ALTAMAS KABIR ) New Delhi ;
11, 2006 IN THE
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION Salim Akbarali
Nanji Appellant Versus Union of India & Ors. Respondents
B.P. SINGH, J.
issues involved in this case are the same as in the connected civil appeal
which we have dismissed by our judgment and order today. In this case as well
the petitioner prayed for quashing or setting aside the permission granted by
the Reserve Bank of India to the Respondent Bank to write off
the non-performing assets. The petitioner had filed a writ petition before the
High Court of Judicature at Bombay being
Writ Petition No.2615 of 2004. By our order dated July 25, 2005, the case was transferred to this Court so as to be heard
and disposed of with the connected civil appeal.
case is also dismissed but without any order as to costs.