Bank's response to the borrower cannot be taken as a statutory authority: High Court

Bank's response to the borrower cannot be taken as a statutory authority: High Court

Decision to sanction financial request is the bank's prerogative

The Karnataka High Court has held that the response of a bank to the requirement of its borrower made in the course of commercial dealings has to be examined from a different perspective. It cannot be considered an order of the statutory authority.

The judgment pertained to the Traegen Systems case whose loan account was declared a non-performing asset (NPA) in 2019 by the South Indian Bank. The company then made a request to the bank for financial assistance under Credit Guarantee Scheme for Subordinate Debt.

However, the bank rejected the request by simple communication, which led the company to file a petition challenging the communication.

Justice Krishna S Dixit held that the transactions between a bank and its borrower had commercial overtones of a contractual relationship. He emphasized that it will remain so even if the bank is considered as a State under constitutional law.

Rejecting the petition, the judgment said that irrespective of whether a bank can be considered a State or not, the decision not to grant the Credit Guarantee Scheme to a customer rests on the bank.

Not finding the argument of the petitioner meritorious, the Court observed that the bank's decision to not sanction financial requests could not be faulted. It cited the example of several public sector banks that shut down or merged with other banks after incurring huge losses because of the lending schemes.