Navigating through the Murky Waters of Debt Recovery by Cooperative Banks

  • Urmil Shah

The Indian banking system presently consists of 1,544 urban co-operative banks and 96,248 rural co-operative banks and around 1,540 of these cooperative banks have a depositor base of over 8.60 crores. With the rising significance of cooperative banks in the country, the need for uniform regulation of banks has only been amplified. The Supreme Court’s judgment in Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd. is a way forward in upholding the statutory rights of cooperative banks to recover debt using the mechanism of enforcing of a security interest under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Prior to the enactment of the Recovery of Debts & Bankruptcy Act, 1993 (RDB Act) which provided for debt recovery by filing applications before the Debt Recovery Tribunals, recovery of dues to banks was governed by the Civil Procedure Code, 1908 by way of civil suits. There was a need for quick resolution of non-performing assets and consequently, the formulation of SARFAESI Act was recommended by the Narasimham Committee keeping in mind the changing commercial practices in the banking and finance sectors. The Act empowers banks and financial institutions to obtain possession of the collateral securities and dispose of them without any intervention of courts within 60 days of failure of repayment by the borrower.

Scope of “Banking” – Colourability of Union Legislature?

The term “cooperative banks” was not codified under the original Banking Companies Act, 1949 which led to a furore between the Legislature and Judiciary only to be settled by way of harmonious construction in present judgment as the Union Legislature was given the authority to enact laws only in respect to “banking” functions of banks. The legislative framework for the regulation of cooperative banks in the Banking Regulation Act, 1949 (BR Act) was envisaged for the first time by the Banking (Amendment) Act, 1965 w.e.f. 1966 and the Presidential recommendation to the Notes on Clauses made it clear that Part V was added to govern “banking” activities of central co-operative banks, state co-operative banks and primary co-operative banks. The dispute, which also forms a subject-matter to the present case, arose as the State Legislature under Entry 32, List II was given the sole authority to enact laws for “incorporation, management and winding up of co­operative banks” and a conjoint reading of Section 22 and Part V inferred that the Union Legislature violated the spirit of federalism.

Section 6 of BR Act provides an exhaustive list of ancillary functions that can be performed by banking companies, in addition to the primary function of credit creation; the conflict, however, arose as to whether the term would encompass the function of debt recovery which is not expressly provided under sub-clause (a) – (o). The dictum in Greater Bombay Co-Op. Bank Ltd vs M/S United Yarn Tex. Pvt. Ltd., in context of RDB Act, was overturned where it was held that the field of co­operative societies cannot be covered under Entry 45 for want of explicit provision. Considering the modern demands of trade and commerce, the term couldn’t have been afforded a rigid contour, although as envisaged by the drafters of the BR Act, and thus a purposive interpretation was adopted to include the functions of debt recovery by cooperative banks. The Union Legislature has the legislative competence to setup special mechanism for debt recovery by banks as the definition of “banking company” in the SARFAESI Act stems from Section 2(1)(c) of BR Act which is broad enough to encapsulate cooperative banks so as to aid them in their debt recovery operations.

Debt Recovery under SARFAESI Act- The Pith & Substance of Ex Abundati Cautela

Although there is the existence of cooperative tribunals under the state cooperative societies legislation for debt recovery; however, for procedural aid to cooperative banks, the Ministry of Finance and Company Affairs by way of a Government Notification in 2003 utilized the residuary clause under the SARFAESI Act, to allow the access to security enforcement mechanism under section 13(4) by making the RDB Act inapplicable. Questioning the vires of such notification, Gujarat High Court in Administrator, Shri Dhakari Group Cooperative Cotton Seal v. Union of India, relying on the Greater Bombay ratio struck down the notification. Consequently, in a bid to reinstate the existing position, the Union Legislature passed the Amendment Act, 2013 and included the definition of multi­-state co­operative bank within the SARAESI Act u/s. 2(c)(iva) which was held constitutional by the same court

In cases of legislative overlaps between List I and List II, the dominant legislation can be determined by way of liberal construction, having regards to the nature and extent of encroachment. Considering the object, scope and the mischief that the SARFAESI Act tries to resolve by providing an additional remedy to cooperative banks for efficacious and expeditious recovery such that their legitimate dues do not remain pending on account of the backlog of cases before the civil courts or DRTs, even if the Union Legislature while exercising its functions incidentally trenches into the unchartered territory, amount not amount to incompetence. Despite, the existence of alternative remedies of cooperative tribunals and DRTs available to cooperative banks, the 2003 notification and 2013 amendment are constitutional as there are in pith and substance to the power under Entry 45.

Conclusion – The Way Forward

The Supreme Court has ensured that the cooperative banks do not suffer the wrath of misinterpretation of the clear legislative will over their regulatory status as it will now result in quicker recoveries and better safety of deposits. To provide deep and pervasive control of RBI over cooperative banks in light of recent PMC Bank and CKP Bank scams on account of mismanagement and deregulation, the Union Legislature to come up with the Draft Banking Regulation (Amendment) Bill, 2020 which has envisaged operation of provisions pertaining to the supersession of the board of directors and winding up of cooperative banking companies. The competence of the Union Legislature in light of conflicting jurisprudence and the attempt to settle the debate by the Pandurang Ganpati judgment remains to be seen.

The author is a 3rd Year student at AURO University