Supreme Court Issues Notice on RBI’s Appeal Against Kerala High Court Order Directing Removal of Loan Restrictions on Cooperative Bank

Supreme Court Issues Notice on RBI’s Appeal Against Kerala High Court Order Directing Removal of Loan Restrictions on Cooperative Bank

The Supreme Court has issued a notice against the Kerala High Court’s order lifting Reserve Bank of India (RBI) imposed loan restrictions in Tiruvalla East Co-operative Bank.

The notice was issued by a division bench of Justices Sanjay Kishan Kaul and Sudhanshu Dhulia.

Attorney General for India R Venkataramani appeared for the RBI.

The Attorney General, who appeared for the Reserve Bank of India, pointed out in the Supreme Court that the restriction was imposed in the context of finding serious irregularities in the granting of loans.

This credit restriction was imposed by the RBI last year in the Tiruvalla East Co-operative Bank which happens to be one of the largest urban cooperative banks in Kerala. RBI decided to place restrictions based on an inspection report compiled after carrying out inspections at the headquarters and various branches of the bank.

However, the bank approached the Kerala High Court stating that the RBI action came without considering the bank’s version. Following this, High Court gave an order favorable to the cooperative bank. The division bench of Kerala High Court had affirmed the order of a single judge that lifted the restriction placed on the Co-Operative Bank by RBI to stop further sanction/disbursal of loans and advances as the bank was not given an opportunity of hearing.

Referring to the Banking Regulation Act, 1949, the Kerala High Court had observed that the RBI cannot completely prohibit the transactions of the bank under Sections 35 and 36 unless there were exceptional circumstances to do so.

The High Court had observed that factual appreciation was required before passing orders of prohibition and that an opportunity of hearing must be given to the banking company before passing such an order.

In this context, the High Court had observed that, “We are of the firm view that in normal circumstances, RBI cannot pass a prohibitory order under Section 36(1) without giving banking company an opportunity of being heard. The deviation is exceptional and that too, to protect public interest. If RBI intends to pass such an order, it must demonstrate with reasons in the order itself how the larger public interest would adversely be affected if prohibition order is not imposed.”

The High Court thus, concluded that the RBI had not given proper reasons before passing the order, which showed non application of mind:

“...no demonstrable reasons are assigned by RBI before resorting to complete prohibition of disbursal of fresh loans and advances. If the particular loan scheme is against banking policies, RBI could have ordered the bank to stop advancing loan under that scheme till deficiencies are cured. We already noted that no reasons are assigned in the impugned decision except the appending inspection report. In such circumstances, we are of the view that the impugned decision prohibiting disbursal of fresh and advances was without application of mind.”

It was against this High Court order that the RBI sought intervention from the Supreme Court. Apart from Attorney General Venkataramani, Advocate M.R Ramesh Babu also appeared in the Supreme Court representing RBI.

Since the RBI has not requested any stay on the High Court order, Tiruvalla East Co-operative Bank has no hindrance in offering loans.