NEW DELHI : The Supreme Court on Tuesday subjected cooperative banks to a strict 2002 law that allows lenders to seize and sell the assets of defaulters, in order to give a boost to these institutions which play a vital role in financial inclusion in large areas of India.
The Securitization and Reconstruction of Financial Assets and Security Enforcement Act 2002 (Sarfaesi Act) also applies to cooperative banks, ruled a constitutional bench of five judges headed by Judge Arun Mishra. According to the judgment, cooperative banks fall under the category of banks as defined in Article 2 (1) (c) of the Sarfaesi Law, and the recovery procedures mentioned in this law also apply to cooperative banks.
The bench, which also included Judges Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose, also confirmed the legislative power of Parliament to bring cooperative banks under the scope of the Sarfaesi Law. The bench also effectively upheld a January 28, 2003 notification issued under the Banking Regulatory Act of 1949, which categorized cooperative banks as “banks” under the law.
The Sarfaesi law allows secured creditors to take possession of the assets of a borrower who does not pay his contributions within 60 days of the repayment request. The 159-page unanimous judgment also found that cooperative banks were bound by the provisions of the Banking Regulatory Act of 1949 and all other laws applicable to banks under the RBI Act. As a result, cooperative banks will have to comply with these rules.
According to an RBI report, there were 1,551 urban cooperative banks as of March 31, 2018 and 96,612 rural cooperative banks as of March 31, 2017, the latter accounting for 65.8% of the total asset size of all cooperative banks.
The recent crisis surrounding the Punjab and Maharashtra Co-operative Bank Ltd and other such lenders exposed the vulnerability of co-operative banks, after the central bank replaced the advice of lenders after discovering several irregularities.
“Recognizing that cooperative banks can have rights Sarfaesi should allow cooperatives to have better control over the management of defaults and over the negotiating table with defaulters. It was an unnecessary handicap for a significant part of the credit system, ”said Bikash Jhawar, partner of L&L Partners.
The Constitutional Bench ruled the issues after a series of conflicting rulings from earlier Supreme Court rulings in 2007 and 2002.
The court was also approached to decide on the competence of Parliament to amend the definition clause (provision in a law where words are defined) to add multi-state cooperative banks under the Sarfaesi law.
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