A five-judge constitutional bench of the Supreme court led by Justice Arun Mishra has recently cleared the air regarding the governance of the cooperative banks under the Union laws or the State laws. The apex court, while upholding the applicability of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) on the cooperative banks, made it explicitly clear that these banks are subjected to and governed by the Union laws in as much as they regulate “banking activities”.
The judgment came in view of persistent confusion on whether the Parliament has legislative competence to regulate the financial assets of cooperative banks formed under the state laws. The tussle between the power to regulate these cooperative banks was typically between two entries in the Seventh Schedule. The legislative domain of ‘banking’ falls under the Union parliament by virtue of entry 45 of List I and the jurisdiction of legislating on matters related to ‘incorporation, regulation, and winding-up…of…co-operative societies’ has been given to the state legislatures by entry 32 of List II. The possibility of overlap between these two entries with respect to the cooperative banks arises because these banks are both cooperatives societies which are to be formed under the state legislation and also perform the banking functions which are largely governed by the central legislations.
The confusion and the dual control of these cooperatives began when the parliament included these cooperatives under the definition of a ‘banking company’ under the central Banking and Regulation Act, 1949 (henceforth, BR Act). Thereafter, the multi-state cooperative banks were added to the definition of “banks” under the Recovery of Debt and Regulation Act, 1993 which was upheld by the High courts of Bombay and Andhra Pradesh.
In 2002 when the SARFAESI Act was brought in, it further defined banks and multi-state co-operative banks after which, in 2003, the central bank notified that the cooperative banks were allowed to proceed under the recovery procedure defined in the SARFAESI Act, 2002.
Thereafter, the High courts had given conflicting views on the issue of governance of cooperative banks under the central laws in the cases of Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd and Union of India and Anr. v. Delhi High Court Bar Association. The Bombay High court had noted the differences between peoples’ co-operative banks serving their members and corporate banks doing commercial transactions and ruled that the “the co-operative movement was to be left to the States to promote and legislate upon and the banking activities of co-operative societies were also not to be touched(by the centre) unless Parliament considered it imperative”. However, the Delhi HC observed that “In exercise of its legislative power relating to banking, the Parliament can provide the mechanism under entry 45 of List I by which monies due to the Banks and Financial Institutions can be recovered” while holding that the cooperative banks can be regulated by the centre under the BR Act.
Clearing all the doubts and confusion regarding the regulation of the cooperative banks as ‘banking companies’ under the central legislations, the apex court held that
- The cooperative banks registered under the state legislation and the multi-state cooperative societies established under the Multi-state Cooperative Societies Act, 2002 (MSCS Act, 2002) which undertake ‘banking activities’ would be governed by every legislation which is promulgated by the centre under Entry 45 of List I of the Seventh Schedule. All aspects of the cooperative banks, except the ‘incorporation, regulation and winding up’ which are covered under entry 32 of List II, would be covered by the central legislations.
- The cooperative banks are “banking companies” under section 5(c) read with section 56(a) of the central BR Act. They cannot carry out any activities without the compliance of the provisions of the BR Act and any other central Act related to banks.
- The cooperative banks are ‘banks’ under section 2(1)(c) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
This is because “recovery is an essential part of banking and hence the recovery procedure under section 13 of the Act would be applicable to the Cooperative banks”.
This judgement is a welcome decision after the recent crises relating to cooperative banks such as the Punjab and Maharashtra Cooperative Bank Ltd have surfaced. It has remedied the malady of inordinate delay in recovery of dues through civil courts and cooperative tribunals. As per an RBI report, published on March 2019, the growth of these co-operative institutions under the respective state laws has not been commensurate with that of other constituents of the banking sector in India. At the end of March 2018, the combined assets of urban and rural co-operatives were 10.6 per cent of the total assets of scheduled commercial banks (SCBs), down from 19.4 per cent in 2004-05. Of course, several operational and governance-based impediments have operated as drags on their performance, but the inability of recovering long-pending dues had been stunting their growth. Now, under the SARFAESI Act, the cooperative banks will now be able to take benefit of the stringent recovery procedures and would be empowered by the central legislation to seize and sell the assets of the defaulters after the close of the 60-day repayment period.
The cooperative banks have been financially stressed from the huge unrecovered debts and are marred with instances of irregularities. The inefficiency of the debt recovery under the state laws have already been exposed by the cooperatives’ crises in the banking sector, portraying that such a change in the debt recovery procedure available to the cooperative banks was imperative. The regulation under the central SARFAESI Act and the availability of a stringent recovery process will encourage these cooperative banks to pursue recoveries of the long-pending dues with much more enthusiasm and reduce their non-performing assets (NPAs). Since this effective and stringent recovery procedure was never available to the cooperatives, they were in a much-disabled position when compared to other commercial banks which have been rectified by this judgement.
The co-operative banks can be expected to become stronger in a relatively shorter period of time with the use of this recovery procedure under the Securitisation Act. The Act will prove to be a handy and valuable tool for these banks as entering the extortionate litigation process for the recovery of their comparatively smaller loan grants becomes inordinately expensive for these banks. Hence, subjecting the cooperative banks to governance under the central laws such as the BR Act and providing them SARFAESI rights should put these banks in a better position while negotiating upon the defaults in the recovery of loans.
ABOUT THE AUTHOR
Akash Kumar Prasad
Akash Kumar Prasad is pursuing B.A. LLB (Hons.) at NALSAR University of Law, Hyderabad with a special interest in corporate law, real estate and intellectual property rights. He aspires to work for the rights of women & children and contribute his bit towards climate change.
Khushboo Agrawal is a student at NALSAR University of Law, Hyderabad. The fields of Intellectual Property rights, Competition law and Financial regulatory practices interest her. She aims of working in the Social Welfare International Organisations in the future.