Bank's response to borrower cannot be considered an order of statutory authority: Karnataka High Court

The Karnataka High Court recently held that the response of a bank to the requirement of its borrower made during the course of its commercial dealings, cannot be equated to the order of a statutory authority [Traegen Systems vs South Indian Bank and ors].

Single-judge Justice Krishna S Dixit held that the principles applicable for judicial review of a banks' response to its customers will be different from the ones applicable to the review of actions of statutory functionaries.

"The response of a Bank to the requirement of its borrower, made in the course of its commercial dealings cannot be approximated to an order of a statutory authority....The principles on which a Bank’s response to its customers have to be examined in a judicial review are much different from the ones that ordinarily apply to the review of administrative actions of the statutory functionaries," the judgment said.

In the present case, the loan account of the petitioner company, with South Indian Bank was declared a Non-Perfoming Asset (NPA) in December 2019.

Owing to this, the respondent bank took coercive recovery proceedings in terms of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The petitioners’ request for financial assistance under Credit Guarantee Scheme for Subordinate Debt (scheme) was rejected via a simple communication, which prompted the present petition before the High Court assailing the same.

Senior Advocate Aditya Sondhi appearing for the petitioner, argued that the bank's communication was bad in law since it did not contain reasons for the rejection.

It was further argued that since the bank is an instrumentality of the State, under Article 12 of the Constitution of India, it ought to have given reasons in the communication for rejecting petitioners’ request for financial assistance under the Scheme.

However, the Court did not find the argument meritorious stating that the bank is not a statutory body.

Further, the Court said the transactions between a banker and the borrower have the overtones of a contractual relationship even if the lender bank happens to be an instrumentality of ‘State’ under Article 12 of the Constitution of India.

"The Writ Courts neither have the means nor the knowledge to re-evaluate the “prudential decisions” of the Banks that are made in the course of commercial transactions; after all, the scope of judicial review of ‘Bankers Decisions’ is too restrictive as observed by a Division Bench of this Court in Manne Guruprasad v. M/s Pavaman Ispat Pvt Ltd.," the Court said.

The Court further opined that banks taking decisions not to sanction certain financial requests cannot be found fault as nowadays about two dozen public sector banks have been closed down or merged with other banks owing to unscrupulous lending being one of the main causes.

"The individual benefit of a customer under the scheme cannot outweigh the public trust which all banks are saddled with; an argument to the contrary may imperil the interest of other valuable customers of the bank, which is not a desirable thing to happen," the Court opined.

The Court also said that reckless speculation and greedy eyeing of profits compromising safety of public funds are shunned by prudent bankers all over the world.

"It is also true that good bankers will not dodge their responsibility to lend to creditworthy regular customers, whether large or small, the minimum amounts needed to keep those customers’ activities viable; banking needs to be run with great caution, while adventure to a certain extent may be necessary for other kinds of business i.e., Industry & Commerce; reckless speculation and greedy eyeing of profits compromising safety of public funds are shunned by prudent bankers all over the world."

In view of the same, the Court rejected the petition.

[Read Judgment]